September kicks off on a sour note

The S&P 500 manages to keep a deathgrip on 2,000, but key areas of the market are already buckling under pressure.

By InvestorPlace 3 hours ago

Credit: © Spencer Platt/Getty Images
Caption: Traders work on the floor of the New York Stock Exchange on August 18, 2014 in New York
Image File Name: Markets_081914_RM_300By Anthony Mirhaydari


Traders and investors returned from the last hurrah of summer to a cold dose of reality Tuesday. ISIS extremists are beheading journalists. Russian-backed separatists are on a roll in Ukraine. Major central bank decisions loom. And corporate bonds are under pressure -- especially junk bonds -- in a way that has accompanied turbulence for stock prices.


While the Standard & Poor's 500 Index ($INX) did all it could to stay above 2,000 on Tuesday, key areas of the market are already buckling under pressure. Energy stocks in particular are showing signs of weakness. And currencies were extremely lively, with the U.S. dollar surging against the yen.


The question now is: Where does the market go from here?


Market history suggests caution is warranted. September is one of the poorer-performing months of the year historically, with an average loss of 0.5 percent for the S&P 500 since 1950.

Moreover, September has been the stage for some large-scale pullbacks, including a 7.2 percent drop in 2011, a 9.1 percent drop in 2008, an 11 percent drop in 2002, and an 8.2 percent drop in 2001. In fact, September was a down month for four years in a row through 2002.


The geopolitical situation remains dicey not only in Ukraine but throughout the Middle East as well. Overnight, there were multiple concerning reports out of Saudi Arabia. There was a small attack on an oil pipeline in the east after officials detained 88 individuals said to be planning terrorist attacks.


Outweighing all this, for now, has been the steady march of solid economic data.


The ISM Manufacturing index climbed to its best level in three years in August with the new orders component rising to its best level since April 2004. This is lifting expectations heading into Friday's all-important payroll report, with analysts looking for payrolls to expand by around 200,000.


Unless this economic enthusiasm translates into broader market participation to the upside, I think stocks will run into trouble in the days to come.


For one, the percentage of NYSE stocks above their 50-day moving average stands at just 65 percent -- despite the S&P 500's push to record highs -- compared to nearly 85 percent when the market was making new highs back in June and July.


Also, the CBOE Volatility Index (VIX), Wall Street's fear gauge, tested above its 50-day moving average again Tuesday -- as it did last week -- in a sign that options traders are paying real money for protection against a downside move in stock prices. The VIX is been rising over the last two weeks in defiance of the S&P 500's push to new records.


But it's the drop in junk bonds, as represented by the iShares High-Yield Corporate Bond Fund (HYG) that has me most concerned.


Bonds are the backbone of the market, given the influence years of cheap-money stimulus from the Federal Reserve have had on yields, spreads, and the usage of cheap credit by executives to bolster stock prices via share repurchases and higher dividends. Another bout of weakness in junk bonds will suck the wind out of stocks.


Given the poor seasonality, the technical issues, the bond market weakness, and other catalysts (geopolitics, looming central bank decision) I've recommended investors raise some cash and plan on thinking defensively at least through Election Day in November.


New opportunities on the short side are popping up, such as General Electric (GE), which has lost its 200-day, 50-day, and 20-day moving averages.


I've added a put options position in GE to my Edge Sample Portfolio.


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

Tags: GEHYGVIX
6Comments
2 hours ago
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They are saying 3000 because they are stock pumpers!
1 hour ago
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What will it take? Crowbar shots to the head? There is NO economy. Garbage alumni stole careers and are repeating EXACTLY what they claimed predecessors were doing. Alumni are blockading jobs, stealing the future of America and forcing it into indenture. What the Hell good is the S&P if it's fake money funded? 
Close the banks, end the Federal Reserve and get RID of Wall Street. Stock grubbers WILL repay all of this- it was useless worthless and irresponsible-- their lifelong hallmarks. 
22 minutes ago
avatar
Future possible scenario (from a card reader):
March 14, 2015, ISIS have reached the US and the CIA (controlled idiots agency), the FBI (federal bureau of idiots) are trying to get Obama off the golf course to make a plan on how to stop them.

If the above is not familiar to you, then get used to news like this since Obama don't care anymore.

Now, go on with your "stock racket" news.
24 minutes ago
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We are bombing countries all over the so get ready we will pay for killing these people. China is not killing or bombing they are smarter than the USA.

22 minutes ago
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"Traders and investors returned from the last hurrah of summer to a cold dose of reality Tuesday."


We are sitting virtually at, near, or above historically highs so what the heck are you talking about? This is a market that has for so long not seen a Real kick in the Pants downturn that when it does happen, some folks won't know what hit them. Aunt Yellen is still keen on inflating this Bubble until there is nothing left for it to pop in Epic Fashion.


Central Banks have to be NEGATIVE on the Markets otherwise they wouldn't still be printing to the Tune of $10Trillion and plus counting some 6 years after the Great Recession. I am still waiting on the answer of Banks Marked to Market as opposed to Marked to Fantasy currently. I am also waiting to hear about the ability of the Central Banks to react once we once again face another Recession.


When Dumb and Dumber keep on doing the same foolish things, you have to repeat it over and over again until they change their tune. So as long as the Central Banks sell out our future, I will keep repeating how they are doing so.


There are no free rides. Folks have quickly forgotten that just a few short years removed from the last recession. Central Banks shouldn't be in the business of determining losers and winners. However that's exactly what they have been doing. Audit the FED, then END the FED. It's the only way moving forward. Otherwise we risk losing everything.

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