One week into the most volatile six weeks of the year and still no volatility.
This is like those old Wendy's commercials starting in 1984 where the little old lady is buying a hamburger at a competing chain and it is missing a big beef patty. (Where's the Beef Commercial) Here we are already one week into the worst 6-weeks period and there has been no volatility. Yes, there was some gyrations on Friday surrounding the Fed speakers but the markets came right back to settle near where they started.
The S&P traded in a 27-point range but recovered to close with a low of only 3 points. The Nasdaq traded in a 62-point range but recovered to end the day with a 6 point gain. The Dow traded in a 237-point range but only lost 50 points at the close. The Russell 2000 traded in a 19-point range but only lost 2 points.
The Volatility Index ($VIX) gyrated nearly 3 points but gained only +0.02 at the close. Despite the intraday market moves, there was no material volatility. Decliners did beat advancers by a 4:3 ratio but that was also minimal.
Eventually we are going to see volatility arrive and it could be scary. The S&P has traded in roughly a 30-point range since July 14th. There were a couple intraday moves above and below that range but they were quickly reversed. When accounting for the dip to 2,147 and the intraday high to 2,193 that give us a 47 point extreme range. Technically speaking, when a breakout/breakdown occurs it should run for at least 47 points. That would put the index around 2,100 or 2,240 depending on which direction appears. With September volatility usually to the downside, that makes the 2,100 level the likely target.
The daily chart suggests the converging lines of resistance could make it difficult for an upside breakout and there is little support for the index if it decides to move lower. The dotted blue line was the 2,130 high from May 2015 and should be minimal support on a decline.
The same converging resistance lines on the Dow at 18,625 could make a move higher difficult to achieve. However, there is little support before 17925-18000. The 18,350 line was the prior high from May 2015. A likely scenario would be a drop to the 18,000 level or slightly below but a return to 17,135 would be highly unlikely.
The Nasdaq has strong support at 5,200 but it is being tested with greater frequency. It is likely to fail and it could be a long drop to the 4,968 level. The Nasdaq had a very good run thanks to the semiconductors and biotech stocks but that run may be losing traction.
The key index to watch is the Russell 2000. The Russell remains in a strong uptrend while the big cap indexes have stalled and been moving sideways for the last 8 weeks. The Russell is the market sentiment indicator. Fund managers will not buy small cap stocks if they expect market weakness because they are not as liquid. They cannot exit quickly if disaster strikes. Watch support at 1,225 and again at 1,205.
The earnings calendar is weighted towards Thursday with several larger names reporting. There are a lot of retailers this week and weakness in retail earnings tend to drag on the overall market.
There is a busy economic calendar this week with the employment reports the key to the market. The Fed has rekindled the possibility of a rate hike at the September 20th meeting and a strong employment report would almost guarantee that hike.
I continue to recommend keeping your stop losses tight and plan to reestablish any stopped positions on any September dip. Market lows for the last six months of the year tend to happen in Sept/Oct. Remember the Boy Scout motto, "Be Prepared."
Send Jim an email