In my closing post last Friday, Sept. 20, I noted: "Since 1960 the week following the third Friday of September has produced the most negative results of any week of the entire year." While this week didn't turn out to be the worst of the year, the negative seasonality did have an impact. After a late bounce, the S&P 500 was down around 1.0% for the week, the Nasdaq lost 2.2% and the Russell 2000 ETF (IWM) was off 2.4%.
There were two big events that caught the market by surprise during the week. The first was the move toward impeaching President Trump. This caused some selling when it initially hit but market players shrugged it off pretty quickly as just a continuation of the political battle that has been going on since the day he was elected. There are still some worries that this could be a distraction that hurts in moving ahead on some positive policy, however, the market doesn't seem to foresee this drama as a major issue.
The second event that caught the market by surprise was the news that the Trump administration was debating the possibility of denying China the use of U.S. capital markets. This has been mentioned in the past but various politicians but was never considered to be a real possibility until it was reported today by Bloomberg.
The timing is puzzling as both China and the U.S. have made comments lately that there were acting with goodwill and expected progress. China bought agricultural goods while the U.S. withheld the imposition of tariffs.
Chinese markets are closed for a holiday that lasts a week starting next Tuesday so that may prevent further bickering on trade until the negotiations restart the following week.
What has been most notable about the market this week is the carnage that is taking place under the surface in various sectors and high-momentum names. Recent IPOs have been a disaster and were not helped when the Peloton (PTON) IPO traded straight down and never came close to its initial pricing.
Groups such as biotechnology, software, cloud computing and others with aggressive valuations struggled as well. Individual stock-picking has been filled with landmines.
Part of the reason that the indices have not reflected this very well is that bears have feared that they would be caught short in indices when positive China news hit. It was safer to focus on shorting the high-momentum names rather than the broad market.
In addition, the third quarter comes to an end on Monday and there have been many indications that large funds are rotating into value and defensive names. There is a massive amount of money being shifted and it creates some big moves in sectors, but doesn't impact the indices as much.
Overall it is a very chaotic market right now and there are many stocks that have suffered technical damage. There should be some good bargain-hunting going into third-quarter earnings season but many bottom fishers have been burned trying to catch falling knives and safes and they are now hesitant.
It is a very difficult market environment but eventually the better stocks will become apparent and we can do some trading.
Have a great weekend. I'll see you on Monday.