Investors' response on Friday to Federal Reserve Chair Janet Yellen’s speech at the University of Massachusetts Amherst was mixed, as the S&P 500 initially traded near the 1,950 level until around 2:00 P.M. EST when the bond market closed. The index then sharply pulled back towards the close and took away all the gains from earlier in the day. Short-sellers returned with full force and took the S&P 500 healthcare sector, and its biotechnology sub-sector, down another 2.7% and 3.41%, respectively. The index managed to close at 1,931.34 on Friday, down 1.36% for the week. 

This week's market performance should not have come as a surprise as according to MarketWatch, during the past 25 years, the S&P 500 has declined in the week following September options expiration 21 times, with a median loss of 1.3%. Interesting how computerized preprogrammed trading works, isn’t it?

In her speech, Ms. Yellen said that it would likely be appropriate to raise rates from near zero "sometime later this year," although the decision would continue to rely on economic data. Last week, the U.S. Federal Reserve decided to hold off a rate hike and maintain their zero interest rate policy after its Federal Open Market Committee (FOMC) Meeting, citing the economic slowdown in China and emerging markets as the reason for the delay.

The federal-funds futures, commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate only 11% odds for a quarter-point rate hike at the October 2015 policy meeting, while the odds are 39% at the December 2015 meeting, according to data from CME Group as of September 25. The yield of the U.S. 10-Year Treasury Note was up 1.88% for the week to close at 2.17% on Friday, while the U.S. dollar index (DXY) inched up 1.51% for the week to close at 94.434.

Earlier this week, the U.S. equity market was in a tailspin after Hillary Clinton, U.S. presidential candidate, went on a Twitter frenzy on Monday and sent out a tweet about “outrageous” price gouging by a pharmaceutical CEO and caused the biotech and healthcare sectors to crash. Short-sellers saw opportunities and took the rest of the S&P 500 sectors down and wiped out billions of dollars from U.S. retirement accounts. 

One should not solely blame Clinton’s little tweet for the market meltdown, as traders always have excuses to short the market. Mrs. Clinton may have difficulty to find support in the U.S. Congress from either side of the aisle, as experts said that her proposed plan to address drug prices will just shift the costs from consumers onto insurers, who will just increase premiums or refuse to cover more expensive specialty medications. As UBS analyst Matthew Roden put it, Hillary Clinton’s plan to force drug prices lower is, well, “premature.”

The VW scandal dragged the DAX down almost 8% on Monday and Tuesday and spilled over to the U.S. equity and emerging markets. The whole European automobile sector practically collapsed. Deutsche Bank trimmed the year-end target for the DAX to 10,300, from a previous forecast of 11,300, citing a huge headwind from the auto sector, which makes up about a 25% market cap contribution to the German blue chips index.

As of September 22, there are 176,375 short positions of S&P 500 Consolidated Futures, traded on the Chicago Mercantile Exchange (CME) by leveraged funds, a decrease of 642 short positions from the previous week. This is compared to about 81,027 long positions, up 2,505 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

Hedge funds have increased their net long positions by 3,147 contracts from the previous week, worth about $1.6 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. 

The best performing S&P 500 sectors for the second week in a row were Utilities and Consumer staples, which climbed 1.24% and 0.74%, respectively, as investors rotated money out of high risk sectors into defensive, safe havens that offer attractive dividends. 

The worst performing S&P 500 sectors for the week were Healthcare and Materials, which were down 5.77% and 4.02%, respectively, as investors were concerned about the future of the U.S. healthcare industry under Mrs. Clinton. S&P 500 Biotechnology, a sub-sector of the Healthcare sector, plunged 9.5% for the week. The Healthcare sector is typically considered to be defensive because the products and services are essential, despite economic downturns. The S&P 500 Materials sector sold off for the second week in the row, as the concern about China's economic slowdown persists. 

From our short-term technical viewpoint, the S&P 500 continues to move in a symmetrical triangle, in a range between the 1,991 and 1,903 levels, with downside risks increasing as the sell-side wants to see the index retest the 1,867.01 low on August 24. There are near-term supports at 1,910 and 1,880.

The headline risks for the S&P 500 are end-of-the-quarter window dressing by institutional investors, the debt ceiling crisis, the Shanghai composite index and the U.S. non-farm payrolls report due on Friday, October 2. Mr. John Boehner, House Speaker, announced that he will resign from Congress at the end of October. There is speculation that there could be a longer-term budget agreement that also deals with raising the nation’s debt ceiling, and possibly even a major infrastructure bill, before Mr. Boehner heads back to his home state Ohio. 

S&P 500 Summary: –6.2% YTD as of 09/25/15 
Barclay Hedge Fund Index: +0.19% YTD 

Outperforming Sectors: Consumer discretionary +3.52% YTD, Consumer staples –2.31% YTD, Healthcare –2.4% YTD and Information technology –3.44% YTD.

Underperforming Sectors: Telecommunication services –7.05% YTD, Financials –7.77% YTD, Utilities –9.58% YTD, Industrials –11.41% YTD, Materials –17.18% YTD and Energy –22.12% YTD.

S&P 500 ANALYSIS