All eyes remain on this week's FOMC meeting
“… the SPX is now sandwiched between its 20- and 50-day moving averages, and is below double the 2020 March closing low as we head into options expiration week (OPEX). In other words, the technical backdrop has the potential to produce choppy market action… Seasonally, we see a downturn post-OPEX in the month of September, with OPEX typically marking the tipping point for seasonal drifts before finding a low in the first two weeks of October... Risks are present for a swoon post-expiration, so it might be wise to remain more cautious this week with new longer-term positions or even lighten up on some positioning if history wants to repeat. ”
- Monday Morning Outlook, September 11, 2023
In last week’s commentary, we mentioned the technical backdrop as one that could produce further choppiness ahead of a traditionally weak seasonal period in the two weeks after September standard expiration week.
While the jury is still out as to how the second half of September plays out, the choppy action we cautioned you about was evident last week, and a far cry from the strong southern turn stocks took during August expiration week.
During August expiration week, the S&P 500 Index (SPX – 4,450.32) broke below its 50-day moving average as well as the level coincident with double its 2020 closing low. This resulted in a delta-hedge selloff that pushed the index to 80-day moving average by that week’s end.
Last week, the index chopped around its 50-day moving average and double its 2020 closing level, as the SPDR S&P 500 ETF Trust (SPY – 443.37) bounced between its put-heavy 445 strike and call-heavy 450 strike. A Friday move below the put-heavy 445 strike led to brief selling, but the ETF found support at its September low in the $443 area, and the SPX low was at the half-century 4,440 level.
Since early August -- around the time of the last Fed rate hike, the U.S. debt being downgraded by a debt-rating agency, and the SPX hovering 20% above its 2022 close -- equity benchmarks such as the SPX and Nasdaq Composite Index (IXIC – 13,708.33) have struggled for direction. This suggests that bulls and bears have been standing on equal footing for the past several weeks, but bulls have held higher ground since the beginning of the year.
As we enter the second half of September, multiple potential support levels are just below, such as SPX 4,440, which marks the June highs and its close before a break below the bottom rail of channel since the March lows. Meanwhile, the 80-day moving average, which marked two troughs in August, sits at 4,420 with the round 4,400 century mark not far below. For what it's worth, if the SPX experiences its average 1.1% retreat for September, it would end the month at 4,457, just above Friday’s close at 4,450.
Potential resistance levels are immediately overhead, too, with the 50-day moving average and a level coincident with double the 2020 close residing in the 4,470-4,482 area. Above that, bears may exert control at the 4,500 half-millennium level and the most recent closing high at 4,515, which is also the site of potential trendline resistance using the late July and early September highs.
“If policy makers want to send a hawkish message through the dot-plot, they could keep the hike on the table for this year, reduce the amount of cuts penciled in for 2024, and move up the (in)famous R-star, the invisible neutral, long-term rate.”
- Bloomberg, September 14, 2023
The main event this week is the Federal Open Market Committee's (FOMC) meeting. Fed funds futures traders are nearly unanimous in their opinion that the Federal Reserve will keep rates unchanged, after raising them in late July and on the heels of a slightly hotter-than-expected consumer price index (CPI) reading last week. As such, one surprise would be a rate hike this meeting.
Even if the Fed meets expectations and pauses for the second time in three meetings, I though the excerpt above from a Bloomberg news article perfectly summed up what could be viewed as hawkish when the Fed members update their forecasts for the economy and rates in the dot-plot table.
With the market trading aimlessly since around the time of the last rate hike, which followed a pause at the prior meeting, Wednesday’s meeting could give investors a little more clarity and at least spark more direction that what we have observed in prior weeks.
Key into the SPX levels discussed above to better understand whether the needle is finally being moved in favor of the bulls or bears.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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