The Fed Countdown
The Asian markets closed mostly lower and Europe is trading down across the board. The S&P has four economic numbers to get past this morning, and it's our guess that afterwards things will go back to sleep. Let's face it, the most recent rally has been the shorts covering. Once that's over the S&P will be susceptible to selling off a little further. While we understand the risk-on, risk-off type trade, we are not sure that completely speaks for the current slowdown.
Historically, the markets tend to pick up after the Labor Day holiday. Many traders who take time off at the end of the summer or have been inactive start looking for new trading opportunities. It's almost expected that you see an uptick in volatility and overall volume as the market moves into September. The rollover and the quarterly rebalance should help for some increased trade. We call the current slowdown the Labor Day holiday that never ended. We know things slow down when the S&P roll starts, but this is different. The big accounts are barely trading, and while the smaller accounts are still active, they have cut back considerably.
The $85 Billion Question
With the S&P shaking off all the current negatives, the big question is, how will it react during the Fed's two-day meeting? Currently the S&P has pretty much settled into the idea that the Fed is going to taper or pull back, but the idea of just shutting down the program in full is not going to happen. In fact, we think the Fed wants to leave the bond buying program open to adjust up or down if needed.
Yesterday our call was to sell the rally. In the Closing Print video we expected further weakness today, especially this morning. We think it's fair to say that while the S&P futures have rallied, they are not out of the woods yet. Instead they are in a range below a familiar key level of 1678. With that in mind, we lean to selling the early rally and buying weakness.
As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.
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