Saturday, 22 September 2018

Stock Market: Outlook for September 2018

I has been calling for pullback in September, especially a 3 - 5% in SPX.

So far this month, QQQ has pulled back by 3.6% from ATH and SPX by 1.6% from its ATH that it created in August.This is about right with QQQ usually moves X2 faster than SPX in either direction.

SPX continued to make ATH while QQQ make lower high this week. This is understandable because except for Feb and April, QQQ makes new ATH every single month this year, while SPX only made a new ATH last month. You could say SPY is playing catch up or QQQ is playing catch down. In short, mean reversion.

Now that SPY (and DIA) has caught up, this mean reversion should now start in earnest next week. I looked and looked, and i can't see a SINGLE sign that contradicts my pullback thesis: daily RSI bearish divergence in SPX, VIX is near its low, SPY is bumping up against the upper channel while momentum is slowing, and overbought, and then there's seasonality.

Speaking of seasonality, we already had a little pullback in the 1st week of September. September OpEx week is the most bullish, and yet the market wasn't exactly soaring. The week after OpEx is generally bearish. Add to that is the share buyback blackout period before the October reporting season. Share buybacks has put the floor under the market, without it, a pullback becomes easier. This also explain the typical weakness during the last 1/3 of September.

Let's ignore all of that, and just look at mean reversion. SPY is pretty stretched right now.

SPX chart showing times where prices have maximum deviation from 200 dma
SPX chart showing times where prices have maximum deviation from 200 dma
(Click image to enlarge)

The blue arrows are identical copies / length, and they're extending from 200dma. Those arrows show the only other times in the chart where prices are higher / more extended than prices on Friday (21st Sep 2018). Prices pulled back soon at each of the arrows. Except for the arrow in December 2017, which is part of the euphoric rally soon after the Tax Cut announcement. We can exclude that from our analysis. We don't have any catalyst that is even remotely similar today. We only have negative catalyst like Tariff War.

Prices also went up a little more after the arrow at March 2017. But in both March 2017, and the December 2017 arrows, RSI were quite a bit higher and VIX is lower than last Friday, implying that there's less enthusiasm / momentum in the market right now to push prices higher than those 2 previous occasions.

Of course, don't forget there're numerous pullbacks where prices are less stretched than last Friday.

My only question is how deep the pullback going to be?

From a sentiment point of view, i can't see a pullback greater than 3 - 5% in SPX. The range of low and falling VIX since April is telling us that the market is in a no fear / complacent / buy-the-dip mentality.

But technically, a larger pullback is possible if - a big if - that some important technical supports are broken and that would lead to a cascade of stop losses, which in turn exacerbated by lightning speed machine trading, which leads to even further stop losses being hit.

Quite a few of them are sitting precariously on those support levels (e.g. XLK is only some 4% drop to break this important trend line).

XLK showing prices are only 4% from the trend line
XLK showing prices are only 4% from the trend line
(Click to enlarge)