The SPDR S&P 500 ETF (NYSEArca: SPY) is up 7% the past three months but some analysts are predicting an end-of-summer pullback in stocks as the market digests the recent gains.
The last week of August is typically slow with thin trading volume, but investors will be on the lookout for hints of further easing from the Federal Reserve and European Central Bank. [Stock ETFs Wait For Central Banks]
As August comes to a close and vacation season ends, expect a temporary pullback in the S&P 500, but be prepared for the SPX to then breakout to new highs, says Randy Frederick, Managing Director of Active Trading & Derivatives at Charles Schwab.
Below is a note that Frederick sent on Monday:
- “Market indicators are flashing plenty of warning signs that the 1.1% correction we’ve already had may not have been enough, but as soon as the SPX pulls back to the 1375-1390 zone be prepared for a rally that could take the index to new 2012 and 4+ year highs above 1419.
- The small pullback in the SPX is by no means a problem in a market that is up 10% in 3 months and hasn’t even had a 1% down day for 24 straight sessions – remember, markets never go straight up and small pullbacks are healthy as they often help to avoid bigger ones.
- The VIX is currently a couple points above its YTD low – and is still quite low from a long-term historical perspective. It seems to be showing few signs that any kind of sharp spike is in the cards.
- The 5% move higher in the VIX on Thursday given the 11+ point drop in the SPX is a rather modest move considering how low the VIX is currently. At these levels, the VIX is probably still undervaluing the overall risk in the marketplace but downside risk has been limited with the central bankers of most of the world’s largest economies all committed to taking action if necessary.
- With the “Triple Put” of the European Central Bank (ECB), the US Federal Reserve (Fed), the Peoples Bank of China (PBOC) – and you might even include the Brazilian government – standing in the wings ready to take action to support their respective economies, the downside risks in the market remain quite low, so, in my opinion, the greater risk is still in missing out on the upside.
- With a week remaining, August options volumes are virtually flat compared to the 14.7M anemic level in July. In the past few weeks I’ve begun to hear talk that retail traders are starting to get back into the market now, but if that is true, there is no evidence of it in the options market. The year-to-date average now stands at 16.3M contracts per day.”
SPDR S&P 500
Full disclosure: Tom Lydon’s clients own SPY.
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.