In non-presidential election years, the odds of a higher September drop to 42%
“…the SPX has covered considerable ground, traveling more than 1,050 points from its mid-July closing high to the Aug. 5 intraday low and back to Friday’s close in a ‘V-shaped’ pattern…a s equity option buyers grow more optimistic, the SPX is only one-half percentage-point below its all-time closing high of 5,667, which is the next obvious level of potential resistance.“
– Monday Morning Outlook, August 26, 2024
The final two weeks of August both mirrored and significantly contrasted the first half of the month. If you compare the S&0 500 Index (SPX–5,648.40) closes going into August with the mid-month close, they are about the same. And if you compare the mid-August SPX price with the end price, they are also similar.
It is the contrasting path the SPX took in the first two weeks relative to the second that intrigues me. Per last week’s observation, the first half of the month was characterized by the SPX traveling approximately 1,050 points from high to low, and back to the mid-month high in a “V-shaped” rally.
But since the “V” rally was completed, the SPX has chopped around the 5,600-century mark, with multiple touches of this level from Aug. 19 into the month’s end. Plus, there have been equidistant moves above and below this level of roughly 40 points, defining the range high and low of 5,560 and 5,640.
In fact, the 5,560 level that marked the bottom of the two-week narrow range was the intraday high on the morning of Aug. 1 before vicious selling took place, with the SPX troughing just two trading days later at 5,120.
As such, the first levels of support and resistance are at 5,560 and 5,640. Another layer of potential resistance is around 5,670, or the mid-July all-time high. If the range low of 5,560 breaks to the downside, another layer of potential support sits in the 5,500-5,510 range, the site of its advancing 50-day moving average and the level that’s 20% above the July 2023 closing high.
Nvidia (NVDA) reported earnings last week, which was billed as the most important earnings report of the season, given its artificial intelligence (AI) technology and market cap. Federal Reserve Chairman Jerome Powell recently made comments that it’s time to adjust the interest rate policy, amid reports on inflation and employment. None of these had the muscle power to move the SPX out of its narrow range in the second half of August, though.
Now what? We are moving into September, a month that has tended to be more rewarding for bears than bulls. Ironically, amid the uncertainty of presidential election years, the odds that September ends higher is the best, relative to non-election years, with a 50% chance September ends higher in presidential election years.
In non-presidential election years, the odds of a higher September drop to 42%, driven primarily negative returns in the September that precedes a presidential election year. In fact, the SPX was lower 4.6% in September 2023, on cue with the low chance it had of being profitable.
The bad news and good news is that while September is negative on average, whether it’s a presidential election year or not, the average loss is less severe during presidential election years.
Looking ahead, we are all wondering how the SPX will work itself out of the current range, with the arrival of negative September seasonality. One clue as the benchmark enters the week at the top of its range could be in the candle that emerged on Aug. 22 — a bearish outside day, as defined by the intraday high above the prior day’s intraday peak, but the intraday low and close being below the prior day’s intraday low.
On the SPX chart above, I differentiated bearish outside days with small arrows and large arrows, the latter of which means the distance between the high and low was 100 points or more. In the bearish outside days, when the difference between the high and low was 100 points or more this year, intense selling soon followed. This is a risk that bears are watching.
In possibly better news, it has been six trading days since the bearish outside day surfaced without immediately triggering intense selling. But bulls are not yet out of the woods in terms of the implications of the Aug. 22 candle until new highs are carved out.
Perhaps the most important technical observation of all is that the SPX is trading within a chip shot of its all-time high. The direction of the 10-day buy-to-open put/call volume ratio on SPX components continues to favor the bulls, even though there was a slight uptick in this ratio just ahead of NVDA’s earnings last week. This caution proved to be a little excessive as the broader market held its ground, even as NVDA pulled back after its report.
It’s worth noting this ratio still has room to decline before we get to a measured level of optimism that historically puts the market at increased odds of a pullback. Plus, a risk to bears in the context of the SPX knocking on the door of all-time highs is that it remains a heavily shorted market — especially after a 4% increase in total SPX component short interest in the last report.
As we move out of earnings season, companies with buyback programs could rev up the “buyback engine” and, at the very least, keep pullbacks tempered relative to the timeframe before earnings releases.
Todd Salamone is the V.P. of Research at Schaeffer’s Investment Research.
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