The September wall of worry is rapidly crumbling.

They say the market likes to climb a wall of worry over the back of the bears but the wall for September is crumbling into a minor incline. The removal of the budget battle and debt ceiling debate and the associated fear of a government shutdown eliminated two major bricks in the wall of worry. The only material event left in September is the Fed announcement they are going to begin tapering QE on September 20th. That is so well telegraphed there may not be any market consequences.

There is also the potential for another North Korean missile event but that has also been widely predicted thanks to satellite photos showing preparations for a missile launch. As long as the US and its allies do not react badly to the event, it will be just another opportunity to buy a dip.

The markets are funny about direction most of the time. When the wall of worry is the steepest they tend to do well. When there are no apparent obstacles and everyone expects them to simply move higher, many times the opposite occurs.

This is based on investor expectations. If the majority of investors expect smooth sailing to a new high, then those investors are probably already invested. There are very few investors left to buy and the rally fizzles. When everyone is worried about multiple events confronting the market they tend to be in cash or short. When the market suddenly moves higher, it causes them to chase stocks and race to cover shorts.

Today we are faced with no material obstacles. Investors would like to see a tax reform plan but the timing on that is probably late November, if at all. It is not a market mover today.

This means there is a limited number of things that can produce a market rally. We are also in September, normally the most volatile month of the year, and the period when portfolio managers tend to restructure portfolios to take profits and position themselves for the best six months of the year that begins on November 1st.

We need to carefully watch market direction over the next several weeks to determine if the dip buyers are alive and well and what level the sellers are watching for an opportunity to short the market.

Despite everything I just wrote, there was abnormally high activity in SPY calls last week as in hundreds of thousands of new calls being bought. In one trade there were 140,000 September $249 calls purchased with the SPY at $246. Two days later that position had been closed. Even the big money is unsure of market direction.

I showed last week that the A/D line on the major indexes was improving. That improvement has begun to fade. The Dow peaked on Monday and faded the rest of the week. The MACD is on the verge of turning bearish again. The Nasdaq also peaked and the vertical move from the prior two weeks failed.

The small cap and mid cap A/D lines were mirror images of the Nasdaq.



The S&P was the strongest index and the A/D line finished at a new cyclical high. This is 500 blue chip stocks so this is a narrower representation of market breadth. The Nasdaq has roughly 3,000 stocks of all sizes and quality so it is a better representation of market health.


The percentage of S&P stocks over their 200-day average declined to 64.4%, which seems to contradict the stronger breadth on the S&P. This indicator declined for the month of August and has held at this level for two weeks. If this percentage begins to decline further, it would be a sign of shrinking breadth.


The correlation between the High Yield bond ETF and the S&P is currently .94% and holding at recent highs. Investors are pouring money into high yield bonds at almost the same rate as equities in the S&P. Historically this has a very good correlation and the S&P normally follows the HYG. We want the HYG to continue higher.


Facebook continues to be the outperformer among the FANG stocks but Netflix surges slightly after T-Mobile said they were including a Netflix subscription with some of their mobile plans. Amazon and Google are still struggling.


Another challenge for the Nasdaq is some growing weakness in the semiconductor sector. The chip stocks almost always lead the Nasdaq and the sector is declining ahead of the Apple product announcement on Tuesday.


The S&P came to a dead stop at the resistance at 2,480 and then faded for four days. The 19-point decline is not material, UNLESS, it continues. The index is only one good day away from a new high so it would be silly to say the chart is bearish. We need the late August uptrend to continue but there are problems under the hood. The big cap tech stocks are weakening and that is weighing on the S&P.


The Dow is struggling and is currently about 320 points below its recent high. The resistance at 22,000 was solid and the 21,900 level is also a factor. Support is 21,600, 21,500 and 21,300. The breadth on the Dow was negative 2:1 on Friday.


The Nasdaq closed at a new high on Monday but faded the rest of the week. Friday's close was the low close for the week. Uptrend support at 6,300 needs to hold or we could have a breakdown to 6,100, which is major support and should see significant buying. The 6,200 level may not hold if it is tested again because the actual level is rather undefined.


I am not predicting a decline for this week or a rally. I think the market needs to consolidate for a few days and get used to the idea of not having a wall of worry to climb. Now that we are well away from the Labor Day holiday and business should be back to normal, portfolio managers will be making decisions about what they want to hold until year-end. That could create some volatility.

Enter passively and exit aggressively!

Jim Brown

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