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The S&P 500 plunged 5.27% to an intraday low of 1,867.01 on Monday, breaking down through the key technical support at 1,936 and the trendline support at 1,925, before bouncing back to close at 1,893.21, following China's benchmark Shanghai Composite index 8.46% meltdown. It got started when the Shanghai Stock Exchange took a nosedive right at the opening on Monday. China's neophyte individual investors speculated that domestic pension funds would step in and buy into the market at a low entry point but started panic selling after no state pension funds showed up to support the market.
The S&P 500 Volatility index (VIX), known as the "investor fear gauge" and traded on the Chicago Board Options Exchange (CBOE), spiked to 53.29 on Monday, a level not seen since March 2009 when the S&P 500 hit rock bottom at 666.79. The trading volume on the S&P 500 index surged to about 4.9 billion shares, the level not seen since October 2011 during the Greece debt crisis.
Sellers unsuccessfully tried to push the S&P 500 below the 1,867 resistance level on Tuesday, as the investor fear subsided and the VIX plunged to as low as 28.08. The S&P 500, however, closed at the low of day at 1,867.61.
The S&P index finished with a 3.9% gain on Wednesday after Federal Reserve Bank of New York President William C. Dudley said, “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,”. Dudley is the second Fed official to break the silence on a rate hike since the global market crash began.
Federal Reserve Vice Chairman Stanley Fischer told a CNBC reporter on Friday that, “there was a pretty strong case for a September hike, although that had not yet become a conclusion,”. Fischer’s rebuttal argument was directed at Dudley's earlier comment.
Although Federal Reserve officials have not decided in what direction the wind will blow, futures traders are already betting the Federal Reserve will push back a rate hike. According to recent data compiled by Bloomberg, the odds of an increase in September have fallen this week to 26%, down from 40% when the survey was done at the end of July.
Separately, the People's Bank of China (PBoC) cut benchmark rates by 25 basis points and reduced the reserve requirement ratio (RRR) by 50 basis points. The PBoC’s announcement didn’t stem panic selling from China's neophyte individual investors though, as the Shanghai Composite index still fell 1.27% on Wednesday.
The market seems to be more focused on the arguments among Federal Reserve members regarding the timing of the first rate hike than the mixed bag of U.S. economic data reported this week. On Thursday, the U.S. Commerce Department released its second estimate for GDP growth rate in the second quarter 2015 at 3.7%, compared to the preliminary estimate of 2.3%. Economists polled by Reuters had expected that second quarter GDP growth would be revised upward to a 3.2%. The GDP annual growth rate expanded 2.7% in the second quarter, compared to 2.9% in the first quarter this year.
On Friday, the U.S. Commerce Department said that the personal consumption expenditures (PCE) price index increased in July by just 0.3% year-on-year, to 109.76 from 109.43 in July 2014. The PCE index, the Federal Reserve’s preferred inflation measure, missed the median Bloomberg forecast of a 0.4% gain.
The core PCE index, excluding food and energy, decelerated in July to an annual rate of 1.2% from 1.29% in June 2015, the lowest level since March 2011 and well below the FOMC's longer-run objective of 2%.
As of August 25, there are 151,991 short positions of S&P 500 Futures, (CME:SP), traded on the Chicago Mercantile Exchange (CME) by leveraged funds, a decrease of 13,124 short positions from the previous week. This is compared to about 100,719 long positions, up 7,888 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday.
The net long positions by hedge funds has increased for the second week in the row, by 21,012 contracts from the previous week, worth about $10.2 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. For the week ending August 18, the hedge funds' net long positions were 8,271 contracts. The hedge funds’ strategies seemed to work well so far this year as the Barclay Hedge Fund Index posts a 2.77% gain year-to-date, compared to a 3.4% decline for the S&P 500.
The S&P 500 closed at 1,988.87 on Friday, up 0.91% for the week. The best performing S&P 500 sectors were Energy and Information technology, which surged 3.65% and 3.09%, respectively. Both were the worst performing S&P 500 sectors the previous week. The S&P 500 Energy sector got a major boost from the nearly 20% run-up in crude oil prices for the week from Monday's low, after Venezuela asked OPEC on Thursday for an emergency meeting about oil prices. The support of crude oil prices could also have come from Mexico’s government, as it spent U.S. $1.06 billion for put options to hedge oil exports for next year at an average of U.S. $49 a barrel.
The worst performing S&P 500 sector for the week was Utilities, which tumbled 4.32%. Money was rotated out of safe havens and back into high risk sectors. S&P 500 Utilities was the best performing sector the previous week.
From our technical viewpoint, the S&P 500 has been moving in a bearish ascending broadening wedge since the end of 2013. The index suffered an ascending triangle breakdown last week after the weak U.S. and China economic news with the projected target after the breakdown at 1,936.
The S&P 500 broke down through the 1,936 level and the trendline support at 1,925 on Monday and bounced off the lower trendline support of the bearish reverse symmetrical triangle at 1,867.01. If the S&P 500 continues to move higher, the next head resistance is 2,040.
One may want to pay attention that all three major moving averages, 50-, 100- and 200-day SMA, are turning downward and become major head resistances. Hence, there will be some selling pressures as the S&P 500 approaches these moving averages.
The headline risks for next week are the U.S. non-farm payrolls report and China’s stock market. The U.S. Bureau of Labor Statistics will release the jobs report on Friday, September 4, 8:30 AM ET. The market is expecting a 220K jobs gain. The Shanghai composite index, which closed on Friday at 3,232.35, could be heading back south if the index is unable to break through the 3,400 resistance level. The U.S. equity market could take a cue from the Shanghai composite index and take a dive along with it.
S&P 500 Summary: –3.4 % YTD as of 08/28/15
Barclay Hedge Fund Index: +2.77% YTD
Outperforming Sectors: Healthcare +4.65% YTD, Consumer discretionary +4.49% YTD, and Information technology –2.22% YTD, and Consumer staples –2.36% YTD.
Underperforming Sectors: Telecommunication services –3.66% YTD, Financials –4.68% YTD, Industrials –8.56% YTD, Utilities –9.31% YTD, Materials –10.56% YTD, and Energy –18.31%
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