Commentary: Paul Ebeling on Wall Street, Do Not Fear September

Commentary: Paul Ebeling on Wall Street, Do Not Fear September

#WallStreet #PaulEbeling #BigTech #earnings #economy #growth #employment #interest #Bulls #money #FAANGs

$DIA $SPY $QQQ $RUTX $VXX

Last Week’s Action

The trigger the stock-market pullback Thursday and Friday that erased weeks of gainers in the US stock market, may have been embattled investment firm SoftBank, according to a report by the Financial Times of London

The report from the London-based financial paper says that Japanese investing conglomerate SoftBank has been loading up on options in big cap tech stocks over the past several months that contributed to the rally and may have made the market vulnerable to the declinees that equity markets saw last Thursday and Friday.

The FT, quoted 1 investment banker as describing the options purchases that SoftBank made as “dangerous” bets on the market.

Experts say that the boom in options bets in recent wks helped to make the market more susceptible to massive pullbacks like those played out Thursday and Friday.

Thursday, the DJIA finished with a loss of 807.77 pts, or 2.8%, at 28,292.73. The S&P 500 benchmark index closed 125.78 pts lower, down 3.5%, at 3,455.06. The NAS Comp fell 598.34 pts, or 5%, to end at 11,458.10.

Those decliners marked the biggest 1-day falls for all 3 indexes since June.

The FT report suggests the SoftBank investment fund may have been purchasing Bullish Call options.

Call options give holders the right but not the obligation to buy a certain number of shares (100 per option contract) at a certain price (strike price) by a certain date (expiration date).

MarketWatch had reported that bets on call options were rising even as the stock market trades in record-setting territory.

Call options are viewed as Bullish bets on an asset, as opposed to put options, and the data indicated that appetite for calls, particularly among individual investors boomed.

The WS-J wrote Friday that SoftBank bought options tied to billions of dollars worth of individual tech stocks, which may have included Bullish bets on Tesla and Apple.

The WS-J wrote that regulatory filings show the investor bought nearly $4-B of shares in big tech companies in the Spring. They said that not included in those disclosures were the massive options trades, which were reportedly bought to pay off if the stock market rises to a certain level and then lock in gains.

Barron’s in mid-August also reported that SoftBank netted equity gains of $611.5-M in Q-2 after investing $10-B of cash in large-cap stocks.

The reported “aggressive move into the options market” for SoftBank would mark a new chapter for the investment firm, which has traditionally made big bets on start-ups through its $100-B Vision Fund which have proved a black eye for the company run by Masayoshi Son.

A SoftBank spokesperson declined to comment on the trading moves reportedly executed by the firm.

The Technicals

The small-and-mid-cap stocks fell through the 20-day exponential moving average (EMA) and toward the 50-day moving average (MA). This is not a surprise as they were lagging. Perhaps it was a surprise, because, even though they lagged, they should have felt the rotation if it had existed. Instead, they felt the sting of the selling.

NASDAQ: The NAS Comp moved from a gap to a Doji Wednesday to a gap and a pull back to the 20-Day EMA above-average volume. As the index managed to hold the 20-Day MA, the outlook is Bullish.

S&P 500: It gaped open higher Wednesday, gapped back down Thursday and sold to the 20-Day EMA on the low. This index featured above average volume. The outlook is still Bullish with a Very Bullish bias.

This week’s action

Equity trading will be shortened in the US this week as investors take Monday off to observe the Labor Day holiday.

Later in the week, market participants will receive a set of corporate earnings results from “stay-at-home” trade darlings along with lots of economic data including weekly jobless claims, and inflationary data for producers and consumers.

Do not to fear September: In September of the average Presidential-election year, the stock market has risen, in Presidential-election years, not only does the DJIA on average rise in September. There is no sound theoretical or statistical reason to bet that September is bad for the stock market.

Again, September is a positive month in a Presidential election year with the incumbent running.

But even if there were, you still have reason in this election year not to bet against equities in September.

None of this is a guarantee the stock market will not pull back. With 5 months of gainers running, the Bull has every right to pause to refresh specially in a wild year like Y 2020 that has already broken so many historical precedents. My point is that, should the stock market decline, it will not be because it’s the 9 month on the calendar.

I attribute to this strong market action to the following: Fear of missing out (FOMO) and on further gains C-19 vaccine/treatment optimism; continued momentum in the mega-cap stocks and growth stocks; trillions in sidelined cash being put to work by underinvested accounts; renewed embrace of the reopening trade that is benefiting cyclical sectors; negative real interest rates feeding into belief that there is no better investing alternative to stocks; faith in The Trump Fed put; expectations for additional policy stimulus, and the lower trending USD.

Have a healthy week, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.