September Stocks: A Healthy Correction
Matthew Bradbard | Sep 10, 2014 02:50PM ET
U.S stock indices’ traded lower for first half of Wednesday for the third day running with the S&P 500 failing just above the 2000 level in September futures. Let’s assume for a moment that is an interim top. I am expecting a 38.2% Fibonacci retracement, which also comes in near an up-sloping trend line that has held for the last four months. That represents a correction of 4% and, in my eyes, would be a healthy correction that in no way would derail the bull market that has existed for several years. In order for a market to sustain such a move, investors should expect ebbs and flows. Worries over the timing of a U.S. rate increase, economic weakness in China and an impending referendum on Scottish independence has kept trading subdued.
The S&P appears to be finding sellers near the 2000 level while the Dow is meeting resistance near 17100 with the NASDAQ at 4100.This week's losses come after the S&P 500 on Friday closed at yet another all-time high -- its 33rd for the year. The index is up nearly 8% in 2014. Investors are now turning their attention to next week's Federal Reserve meeting at which the central bank could describe when or how it could raise short-term interest rates. Absent any new developments -- but looking at the big picture -- rising yields will tend to put downward pressure on stock prices.
Other Considerations
October ends the fiscal year for many mutual funds, at which point many unload losing positions -- and that could contribute to some window dressing and depreciation in the coming weeks. Historically, September is the worst month on the calendar for stocks. MarketWatch's Mark Hulbert says that after a lousy August there's evidence September comes in worse. While past performance is not indicative of future results the stock market performs most miserably in September and this month doesn't seem likely to reverse the annual trend. If history is any guide, equity indices may be in for another rough ride.
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As for trade ideas, I'm suggesting short ES futures and buying at the money or just out-of-the-money calls for risk mitigation. The trade has just over one week time until expiration. Those looking for more time are advised to purchase bear put spreads in forward months.
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