Stocks face another turbulent week as third quarter draws to a close

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A trader works inside a job on the New York Stock Exchange (NYSE) floor, August 27, 2021.

Brendan McDermid | Reuters

After the recent turmoil, markets are expected to end the last week of the third quarter with another wave of volatility.

Stocks have posted some big moves over the past week. First, fears of financial contagion from Chinese developer Evergrande sent stocks slipping on Monday. Those losses were reversed on Thursday when the market soared. The S&P 500 and the Dow Jones Industrial Average were positive for the week, while the Nasdaq was flat.

“I think this market turmoil hasn’t ended yet,” said Sam Stovall, CFRA’s chief investment strategist. “Certainly September is doing what it normally does. It frustrates investors.”

The three major stock indexes are also up for the third quarter.

Strategists say the way the market trades over the coming week could be the most important development, after wild swings in stocks and also the rapid rise in Treasury yields at the end of the week. The 10-year rate had climbed to 1.46% on Friday after trading at around 1.31% on Wednesday.

The S&P 500 was down about 1.5% in September.

“We are getting long in the tooth. Technical indicators are pointing to distribution. We are seeing prices reversing, width reversing. You see sentiment reversing,” Stovall said, noting that the market width needs to improve, and to many stocks are trading below their 200-day moving average.

October is a “seismic” month

“I think October will be true to itself, which is a very volatile month. October’s volatility is 36% higher than the average for the other 11 months of the year,” Stovall added. “The volatility is higher and you have more pullbacks, corrections and bear markets that start or end during the month. It’s a seismic month.”

Wealth management firm Wellington Shields warns that the fact that many stocks have fallen below their 200-day moving average is a negative factor for the market. According to the firm, only 59% of New York Stock Exchange shares remain above or in an uptrend. The 200-day moving average is the average of the last 200 closing prices of a stock or index, and is considered an indicator of momentum.

“The rule is that when that 200-day number goes from over 80% to less than 60%, it usually drops below 30%. Forgetting that, the point is that while most stocks are making progress, just over half are making enough progress. to be in an uptrend. With the market a few percent below its highs, that’s a concern, ”Wellington said in a note.

What to watch

Over the coming week, a few key economic reports will be released, including durable goods on Monday and ISM manufacturing on Friday. There is also data on personal consumption spending on Friday, which the Federal Reserve is monitoring for its inflation index.

The Federal Reserve will remain a priority in the coming week. There will be a host of speakers from the Fed, including President Jerome Powell, who will testify twice before Congress on the pandemic and the political response to it. Treasury Secretary Janet Yellen will join him for the hearings on Tuesday and Thursday. Powell also appears on a European Central Bank panel with other central bank executives on Wednesday.

Investors will also be watching Congress over the coming week, as lawmakers try to pass a funding plan in time to avoid a government shutdown on October 1. The debt ceiling should be part of this debate, but policy makers don’t expect it to be. solved at the same time. They say it could weigh on markets for several weeks before Congress raises the debt ceiling.

Fed stakeholders are not expected to provide any new information, but they could refine their message after the central bank signaled last Wednesday that it plans to cut its $ 120 billion in monthly bond purchases soon. The Fed also released a new interest rate forecast, which revealed that half of the 18 Fed officials plan to raise interest rates next year.

“I think what the Fed has achieved so far is a crisis-free reduction,” said Marc Chandler, chief Forex market strategist at Bannockburn Global.

“I think a lot of people who invest in the market feel like they’re skating on thin ice, and any crack could be big.… People are very sensitive and nervous because they know valuations are strained.” , did he declare. . “This means we should expect these episodic jumps in volatility.”

Chandler said the market will have to digest recent moves, particularly the rise in Treasury yields.

“What we have to wait for now is to find that new balance. What kind of market should we expect? Trend? Or are we trying to find a range?” he said. “I think we find a range. We need a few hurdles to get through.” Chandler added that a hurdle is the September employment report of October 8.

The Fed is expected to cut its monthly bond purchases by $ 120 billion, unless employment data is surprisingly weak. “It’s the only thing that stands in the way of cutting the Fed,” Chandler said.

Wells Fargo’s Michael Schumacher said the end of the quarter could be calm in terms of big fund rebalancing. “The equity market rebounded. It was up for the quarter. It wasn’t much when you compare it to the performance of bonds,” he said.

The 10-year yield made an unusually volatile round trip in the third quarter. It was 1.47% on June 30 and it reached 1.46% on Friday. In the meantime, it fell to 1.12% in early August. Schumacher said the bond market could be calmer before the end of the quarter and the 10-year yield could then resume rising.

Some strategists view the 10-year Treasury yield as a leading indicator for stocks. It is also linked to developments in technology and other high growth stocks.

And after

Fairlead Strategies founder Katie Stockton said high growth and technology are now sensitive to fluctuations in the 10-year Treasury yield. She said the tech sector is the most overbought in relative terms, when comparing the sector to the S&P 500. The S&P 500 tech sector is up nearly 1% for the week and nearly 6% for the quarter.

“We would consider reducing exposure to growing ETFs like ARKK and we would respect any outages,” said Stockton.

Investors were obsessed with the S&P 500 50-day moving average, which stood at 4,439 on Friday. For the first time this year, the index fell below and closed below the average of several sessions last week. On Thursday he regained all 50 days and finished on top. The broad market index closed above the 50-day moving average on Friday at 4,455.

The 50 day is literally the average of the last 50 closing prices, and it is considered an important momentum indicator, just like the 200 day moving average. A break above could signal a positive move, and a break below could mean more bearish.

Stockton said the S&P 500 relief rally could resume next week. “But we think that will fade by the end of the week given the drops in our mid-term indicators. We expect the SPX to hit a low,” she wrote in a note.

She expects the yield on the 10-year Treasury to continue to rise. “The momentum appears to be moving higher and the next resistance is near 1.53%. The breakout should benefit the financial sector, which has experienced significant outperformance. [Thursday]”, noted Stockton.

Calendar for the upcoming weekr

On Monday

Earnings: Aurora Cannabis

8:00 a.m. Chicago Fed Chairman Charles Evans

8:30 am Durable goods

12:50 p.m. Fed Governor Lael Brainard

Tuesday

Earnings: IHS Markit, Micron, Cal-Maine Foods, Thor Industries, United Natural Foods, FactSet

8:30 am Advanced economic indicators

9:00 am Evans of the Chicago Fed

9:00 a.m. S&P Case-Shiller Home Prices

9:00 am FHFA house prices

10:00 a.m. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen to Senate Committee on Banking, Housing and Urban Affairs on pandemic response

10:00 am Consumer confidence

1:40 p.m. Fed Governor Michelle Bowman

3:00 p.m. Raphael Bostic, President of the Atlanta Fed

7:00 p.m. St. Louis Fed President James Bullard

Wednesday

Earnings: Jabil, Cintas, Herman Miller

10:00 a.m. Pending door-to-door sales

11:45 a.m. Fed Chairman Powell in the European Central Bank panel

2:00 p.m. Atlanta Fed Bostic

Thursday

Earnings: Jefferies Financial, CarMax, Bed Bath & Beyond, Paychex

8:30 am First jobless claims

8:30 am Real GDP Q2

9:45 am Chicago PMI

10:00 a.m. Fed Chairman Powell and Secretary of the Treasury Yellen before the House Financial Services Committee

11:00 p.m. Atlanta Fed Bostic

11:30 p.m. Philadelphia Fed Chairman Patrick Harker

12:05 p.m .: St. Louis Fed Bullard

12:30 p.m. Evans of the Chicago Fed

Friday

Monthly vehicle sales

8:30 a.m. Personal income and expenses

10:00 am Manufacturing PMI

10:00 am ISM manufacturing

10:00 am Consumer sentiment

10:00 am Construction expenses

11:00 a.m. Philadelphia Fed Harker

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