Market must watches for next week

Before we get to what to watch next week, let’s examine where we are first as it was a big week with the Fed meeting and the resulting price action / key indicators.

Current Observations:

• One week to the end of the 3rd Quarter

• No matter if you were bullish or bearish over the quarter, the S&P is virtually unchanged the last 3 months!

SPY SPDR S&P 500 ETF

• Depending on your trading style / timeframe, there were opportunities on both sides of the market if had a disciplined trading system

• Both Yields and US Dollar have rallied (more on this later) which are two headwinds for equities

  US Government 10yr Yield

  

  UUP US Dollar

  

• After last Wednesdays FOMC meeting, the Fed’s target short term interest rate is now 3.25% and Fed Fund Futures are now pricing the rate to be ~ 4.7% by the FOMC March meeting ( represents ~ +1.5% more to go in rate hikes).

  

• The Equity Put / Call Ratio jumped to 1.02 , the highest level in +2yrs

  

• High Yield Bonds HYG broke their Oct lows (adjusting for dividends)

  

• McClellans Advances - Declines US Index Oscillator is now deeply oversold

  

• WTI Crude broke recent lows and is the lowest level since January

  

Now, let’s get to - What to watch next week (events & technicals)

• Seasonality - another week to go for the worst month in a mid term election seasonality, and then onto a more favorable time which coincides with the Jewish holiday Rosh Hashanah - Yom Kippur

  

• PCE Deflator which is an inflation data point that the Fed watches closely is reported Friday, 9/30. Could we see a softening in inflation?

  

• Technicals: the 5d EMA in the indices. In my opinion, price getting back over 5d EMA will be confirmation of a potential short term trend. This is a simple indicator to watch and look how well this provided long and short signals over the last quarter

  

• Breadth: Breadth has been down right nasty over the last month and the NYSI gave a great signal ~ a month ago. I would like to see the turn back up, meaning more advancing names vs declining, and actually cross its 10d MA for confirmation.

  

• The US Dollar and Yields to soften and start to level off and turn lower. Remember, these are headwinds for equities so softening here would be welcomed for the equity bulls.

• Single stock signals. Often after a downturn, we will see some stocks begin to turn higher prior to a bottom in the indices (i.e. the move in Biotech stocks was a great signal in mid Jun that a reversal was brewing).

Conclusion

Many indicators are showing oversold readings (Equity Put/Call Ratio, NYMO) so having a list of areas to watch are important & being prepared! Note, not all of these watch points have to be in effect for a reversal. In my opinion, price is most important, but the more changes that are spotted the better chances of a significant turn vs small bounce. In the meantime, I am personally staying defensive and nimble with a high cash balance until I see evidence of changes outlined above.

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