We hate to be the bearer of bad news, but we are currently in the worst two-week period for the stock market, historically speaking.
September is often known as the worst month for the stock market. That’s true. Here’s a breakdown of the average monthly performance for the S&P 500:
But here’s the thing — we can hone in even more than that. Most of that downward edge is actually concentrated. Specifically, the week following the September Op-Ex (this week) is historically the worst trading week for the stock market all year.
If we weren’t in a minor downtrend, that point would be moot. However, we are in a downtrend — one that saw a false breakout on Thursday.
False breakouts are widely considered to be great trading signals. False breakouts occur when a stock’s price crosses through an identified level of support or resistance, but doesn’t have enough momentum to continue the move, and quickly closes back through the previously identified level. The SPY performed this action through a short-term downward trend line on Thursday — breaking above it, and then just as quickly closing below it on Friday, where it remains today, and has continued downward.
Often, false breakouts add conviction to a trendline, support, or resistance. False breakouts often “psyche out” traders who buy-in following the purported breakout. When the breakout fails, those same traders often exit the trade, adding to potential inverse momentum, and solidifying the trendline.
Add in this evidence to hone in on the trend:
Defensive areas like utility stocks are coming in hot, with most above their 5 and 20 moving averages (93% and 90% respectively). Meanwhile, the tech sector (which contains several of the top-weighted S&P 500 stocks) is looking weak here, with just 20% above their 5 day moving averages, 31% above their 20 day moving averages, and just 34% above their 50 day moving averages. Broadly, when the market shifts into a defensive stance, that can be a sign of weakness in the market. Additionally, when stocks fall below their major moving averages, those averages can act as an area of upper resistance.
In another bearish sign for this week, the VIX has formed a base here off of a 4.5 year low (12.68) that has propelled it higher. The next reasonable area seems to be this upper trendline formed at the beginning of 2023.
In other words, here’s how to trade the SPY in the short-term:
Bearish this week and next, if you believe in historical trends.
We don’t usually make concrete predictions like this here. Often, we prefer showing you technical patterns and unusual options activity, and allowing you to draw conclusions yourself. However, this time, I’ll tell you it’s my opinion that stocks are likely to fall this week.
As we said above, the next two weeks are historically the worst trading period for the stock market all year — this week is the worst week. If we were seeing bullish price action, we wouldn’t care — but we aren’t, so we do.
For these reasons, I believe it’s likely that the market uses Wednesday’s FOMC as a catalyst to move lower in the short-term regardless of what is actually said. This is something we see often with much-anticipated catalysts. It isn’t necessarily that Powell needs to strike a “Jackson Hole” tone, as Piper Sandler analysts have said they believe will happen, or that the Fed needs to “anticipate another rate hike in 2023” (another prediction from the same analysts) — it’s just that events like this which are prone to volatile trading can be the catalyst that pushes a stock (or even the market) toward a direction it was already moving in.
This isn’t a trade recommendation (it never is), just a consideration that the market is likely biased towards a downward direction this week — a direction it usually moves on the week following September Op-Ex. Take that as you will, and good luck out there, Rebels.