Good Bye and Good Riddance to the Third Quarter

GoodByeEquity investors bid Good Riddance to the third quarter Thursday with a relief rally that shaved between 1 and 2% off the Q3 losses for the broad market averages.

This rally actually started in the last hour of trading Wednesday when the S&P 500, +1.9% at 1920 and NASDAQ, +2.25 at 4620, recovered sharply to close above their August 24 closing prices of 1867.61 and 4506.49 respectively, after having threatened to post new closing lows with less than 45 minutes to go.

While it was certainly a relief to see the market avoid making new lows to end the quarter, for right now, this can be viewed as little more than a technical bounce, off a short term oversold level that also lined up with the August 25 lows. It must also be noted that the Russell 2000, +1.5% at 1100.69 did not recover as sharply as the other broad market averages, and has closed below its August 25 closing price of 1104.10 each of the last 2 days.

I must emphasize that the reference point I am using for the August 24/25 lows is the closing low from those 2 days. Clearly, there were many intraday lows in individual stocks from August 24, that show market averages to have significantly lower intraday levels than their closing prices from those 2 days.

There are 2 things to consider here. First, some data feeds calculate their intraday low for market averages from the intraday lows for stocks in the average, regardless of whether those prices happened at the same time of the day. Second, there were many what I call “aberrational prices” for intraday lows on August 24 that should really be “thrown out” when looking at realistic support levels.

Where do we go from here?   First let’s take a closer look at how we ended up at the end of Q3:

The DJIA at 16,285 was -7.5%, a third consecutive quarterly decline for the first time since 2007/08.   The DJIA had notably steeper declines than the S&P 500 and NASDAQ for most of the quarter until getting a nice bump from Nike after the stock rallied 12 to 15 points following their blowout earnings last week.

The August 25 close for the DJIA was 15,666. A bit eerie to see those triple 6s going into October.

djia

The S&P 500 at 1920.03 was -7%. It’s only the second consecutive decline for the S&P 500 and it’s either amazing or fitting that it closed right at 1920.   Remember that level…..1920!!   On August 25, S&P 500 1920 is the level below which a couple of monstrous fund managers had sell programs that took the market down 2 to 3% in the last hour of trading. That day the S&P 500 went from 1925 to close at 1867 in the last hour of trading.

Remember that S&P 500 level….. 1920!!

spy map 1

If you really want to reflect on how much the resilience of the market has changed in 2015, consider this: The late reflex rally on Thursday halted a 5 day losing streak for the S&P 500. “This was the fifth 5 day losing streak in 2015.   In 2014, the S&P 500 did not have one 4 day losing streak!!”     source; Ryan Detrick, CMT@RyanDetrick.

NASDAQ at 4620.16 -7.4% for the first quarterly decline in 4 years. You really can’t talk about the NASDAQ decline this quarter without highlighting the Biotech space. The NASDAQ has been a clear overachiever since at least the middle of 2014 and had the best performance of the first half of 2015 with a 5.2% gain.   As recently as September 16, the NASDAQ had rallied +8.5% off the August 25 low, briefly trading through its 50 moving average.

naz

Then came the route in the Biotech stocks.

The IBB at 303.33 has traded -16% in the last 9 trading days, and even with yesterday’s rally the IBB is still 6.5% below its August 25 close.   We’re certainly not going to argue with taking taking profits in uber beta names that have had hyperbolic price gains over the last 3 to 5 years. Unfortunately, this has come at the worst possible time (just before the end of Q3) for logging quarterly performance.

ibb

The Russell 2000 at 1100.69 -12.3% is no doubt the standout loser for Q3. The Russell is the only broad market index to close Q3 below the August 25 closing level of 11.04.10.   The small cap sector, despite being least sensitive to strength in the US Dollar, is most sensitive to a potential slowdown in the domestic economy.

We’ve really got to keep a close watch on the Russell 2000 as we enter the Q3 earnings season for signs of how investors treat the small cap sector going into the end of the year.

iwm

What to look for as we start Q4

Watch Oil!!!   There was clearly significant liquidation in secondary and tertiary names in the oil sector at the end of Q3.  Even high quality MLPs were not a safe haven.   Oil inventory reports the last 2 weeks have tilted bearish, but oil holds and we haven’t re-tested the $40 level.

The Dominant Trend for Stocks still looks lower.

Even if we get a follow through rally for a day or 2 at the beginning of the month and quarter the technical damage to the major averages will not repair without considerable consolidation.  Fundamentally, Q3 earnings are right around the corner, and expectations are it will be challenging on both the revenue and bottom line EPS comparisons.

The Transports  could be really critical here.  They were the first big sector to break hard months ago, but the selling feels nearly exhausted as they really didn’t threaten the August 25 lows like the broad market averages did early this week.

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