The summer of 2013 delivered a flat performance for the S&P 500 (SPY). The S&P 500 closed at 1,630.74 on May 31st. The 1,632.97 close on August 29th ended the summer with an imperceptible gain of 0.1%. This performance means that my prediction for a positive close to the summer came through with the slimmest of margins. More importantly, buying the summer's dips performed quite nicely even if traders are still holding onto the one trade the summer delivered (oversold conditions in late June).
Flatline for the summer
A flat summer has become a rare occurrence. The summer has closed within +/-1% nine (9) times since 1950: 1962, 1968, 1971, 1973, 1977, 1985, 1988, 1992, and now this year. (I have defined the trading summer as the period between the Memorial and Labor Day holidays in the U.S. and loosely calculated that as price change from the end of May to the end of August). Notice that the S&P 500 had gone 20 years without such a "boring" overall performance. From 1950 to 1992, 19% of all summers performed similarly to this summer. I have posted the distribution chart below where the green bars represent the +/-1% performance range.
Distribution of Summer Price Changes for the S&P 500 from 1950 to 2013
Source: Prices from Yahoo!Finance
I am surprised that the summer ended flat, but it represents an interesting balance in the fight between bears and bulls. The S&P 500 hit all-time highs to begin August trading and nullified the potentially bearish signal of surging interest rates. The dip to the June lows was ostensibly about the fear of higher rates and reduced stimulus combined with fears that earnings reports in July would show confirming signs of economic weakness ahead. Instead, the S&P 500 rallied sharply right through earnings season as companies failed to deliver smoking guns. Even homebuilders refuted the claims that higher rates would hurt business (I have covered this in several places now).
The S&P 500 has now come off those all-time highs in the wake of geo-political tensions over Syria. The 3.1% decline for August is relatively large considering the S&P 500 has not lost this much in a month since May, 2012 when it declined 6.3%. Between these two months, there were only two other months that delivered losses (October, 2012 and June, 2013). So, August's loss is actually VERY mild given the strong on-going surge in the stock market.
The month also ended with the dollar index bouncing well off recent lows, and the Japanese yen (FXY) in retreat. I showed in a previous piece how the numbers seem to indicate the dollar (UUP) is losing its place as a "safety" currency to the yen and even to the euro. So, the last three days of reversal could be early signs that the market is already absorbing the risks from an escalating conflict in Syria.
Decision time coming soon for USD/JPY
The dollar index remains within a wide trading range
So, overall, it seems the bearish and bullish forces remain in balance. Certainly, bears must be getting extremely impatient for a catalyst to spark a real sell-off. The levitation of the stock market seems so improbable given all the surrounding negatives. This resilience so far further emboldens the bulls: for example, imagine what could happen if the Fed delays and/or tempers bond tapering, sequestration finally ends, and/or housing does prove resilient in the face of rising rates, etc…
Bears itching to chase this sell-off lower may experience whiplash. While, the S&P 500 has now bearishly broken down from its 50-day moving average (DMA), the index is also on the edge of oversold conditions (see my latest "T2108 Update" for more details). A further push lower is likely to be met with the same kind of enthusiastic buying that occurred after June's sell-off. The main wildcard is the timing of the event that relieves the market of its final selling pressure from Syria (either a pullback from the warpath or the launch of a U.S. strike). Bulls who get too eager to buy into the developing dip may also experience whiplash, if, as I suspect the S&P 500 does not sustain a near-term bottom until it retests the 200DMA below. At this point, such a retest would neatly coincide with the June lows.
With this balance of bears versus bulls, a new catalyst will need to emerge to break the current balance either to lower lows or to higher highs. Whatever it is, I strongly suspect it will be something that is not yet receiving enough attention…
Be careful out there!
Additional disclosure: I am long SSO calls, net long U.S. dollar, net long Japanese yen