The week following September option expiration is typically the worst week of the year for the S&P 500. Seasonality of this sort is not a certainty, but it is a tendency, and conditions for some difficult trading action this week are good.
On Friday, the indexes fell sharply on higher volume and two-to-one negative breadth, which pushed all the major indexes back below their 50-day simple moving averages. This poor action shifted Investors Business Daily's market outlook to "uptrend under pressure."
All the indexes, except the Russell 2000 (IWM) , still have to drop quite a bit before they undercut the August lows, but the small-caps are in a very precarious position and are barely holding their 200-day simple moving average. Breadth has been poor for a while, and -- as I've pointed out often --there have been almost no strong pockets of speculative action. Most of the recent strength has been in energy and very choppy action in big caps.
The primary issue this week will be the reaction to the Fed interest rate decision and Jerome Powell's press conference at 2 p.m. ET on Wednesday. While no one expects a rate hike at this meeting, the primary issue will be clues about a potential hike on November 1.
Odds of a rate hike dropped last week, but there have been signs of increased inflationary pressures due to oil and continued strength in retail sales and employment. CPI increased to an annual rate of 3.7% in August from 3.2% in July, and the question is whether this was an aberration or the start of a trend.
The economic debate about the extent to which the economy may slow due to the lag effect of all those rate hikes is intensifying, and ultimately, it is going to drive what the market does next. There are still quite a few economists predicting a very soft economic warning, but much of the data related to consumers is showing significant weakness.
It is very likely to be very difficult for trading as conditions are not very good for position trades. There may be elevated volatility for very short-term and day trading, but the choppiness is going to make it challenging.
My best advice right now is to stay patient, keep cash levels high, and don't be in a hurry to build large positions. Opportunities will come, but the charts are not favorable right now.
