S&P Rebalance: Is It Time To Shuffle Your Feet?

Source: Treasury Direct

By Danny Riley

It’s almost comical. Remember how bearish people were after the S&P sold off from up 12% in the first quarter to almost unchanged in the second quarter? After the selloff there was not a bull in the house. On the way up in the first part of the year the bulls ran the markets. For weeks the S&P went up and up. But in the beginning of April the S&P started giving back part of its gains and the bulls disappeared. The big false start completely knocked the bulls off their game. As the S&P poured lower the bears came out in force along with a steady stream of negative headlines out of Europe. The selloff had all the markings of a larger decline. After a dismal 2011, most Wall Street analysts predicted the S&P would gain 8%, but when the S&P was up 12 in the first 3 months of the year they raised their “guesstimates” and down the markets went.

So who can you trust? The S&P is up double the amount most analysts expected. The last time the S&P was up 12% it sold off 12%. With that in mind and considering the runup, it might be a good time to consider a review of your portfolio and do a checkup of your stock holdings before the year comes to an end. This has not been that big an issue over the last several years, but there are a ton of taxes set to go into effect next year that could could harm you or even help you and save you some money.

Some things to think about: Over the last few years when returns for the stock market were lower there was not a big need for “rebalancing.” After several years of the stock market underperforming, most people became more defensive, moving money out of stocks and into bonds. Prior to the end of the bear market a common position was 50% in bonds and 50% in stock. The current weighting goes as high as 65% stock and 35% bonds. Money has been steadily flowing out of bonds and back into stock for the last 5 months. As we said, this year is different and just sitting around could cost your portfolio a lot of money. The Bush-era tax cuts, designed to be good for investors, are set to expire at the end of December. The big thing to be concerned about is that long-term capital gains are going to rise from 15% to 20% for those in the highest tax brackets. So it makes sense to review your holdings and maybe lighten up on some of your winning positions as it’s unlikely the capital gains rate is going to go back down anytime soon. We are not talking about selling everything, we are talking about taking some profits on some of the winners. There is also going to be a tax hike on qualified dividends which will go from 15% to 25% and higher of investors’ ordinary income. There are all sorts of changes and I do not know them all but I do know that it’s important to get a head start on this. While most of this is going to be bad, there are some things you can do.

CHANGES TO THE S&P DOW JONES INDICES
Press release from S&P Dow Jones Indices on additions and deletions of companies for the S&P 500, the S&P MidCap 400 and the S&P SmallCap indices after the close of trading today. (PDF)

Our view:
The S&P snapped a 5-day losing streak and gold is up up for its sixth week and having its best quarter since 2010. Today is the last trading day of September and the third quarter. According to the Stock Trader’s Almanac, today has been down 10 of the last 14 occasions and Monday, the first trading day of October, has been down 4 of the last 6. Asia closed up. Europe is trading lower and it all comes down to the S&P. Our view is we want to play both sides: buy the early weakness and then sell the rally. As we said on the video, one of the trades we look at on the last day of a quarter is called the “walkaway.” How this works is that by 12:00 CT most of the mutual funds have used up all the money they have to buy stocks around midday, leaving the S&P susceptible to a decline. The trade used to work great but has not has the teeth that it used to have. As always, please keep an eye on the 10-handle rule and please use stops.

• It’s 6:00 a.m. and the ESZ is down 3.25 handles at 1437.75, crude is up 27 cents at 92.19 and the EC is trading 1.2933, up 6 ticks.
• In Asia 10 of 11 markets closed higher (Shanghai Comp. +1.45%, Hang Seng +0.38%).
• In Europe 10 out of 12 markets are trading lower (CAC -1.06%, DAX -0.36%).
• Today’s headline: “Spain Cleans Up Kitchen With Bank Test as Bailout Looms.”
• Economic calendar: Personal income & outlays, Chicago PMI, consumer sentiment; earnings from Walgreens

• VOLUME: 1.75mil ESZ and 9.2kk SPZ traded
• SPREADS: 368 SPU/Z spreads traded
• FAIR VALUE: S&P -3.00, NASDAQ -5.50

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Following Wednesday’s fifth consecutive loss for DJIA, the worst streak since July, China again adds another round of liquidity via reverse repo’s as Shanghai hugs multi-year lows. None of the anticipated effects of the stimuli, both domestically and abroad have created any economic momentum to date. The Spanish cabinet was expected to approve 2013 budget, and the news was well received by the equity traders. Well, Rome wasn’t built in a day. However, Athens and Madrid can sustain some collateral damage in the coming days as the local populace share their austerity opinions. Questions are mounting following the horrible, just horrible US durable goods orders, a drop of 13.2% in Aug, biggest decline in more than 3 yrs. The GDP checked in at 1.3 vs exp of 1.7. Holy cow, the GDP at 1.3 is receding quicker than my hairline as the recession birds are chirping! Crude oil firmed today with global equities and headlines that Netanyahu is pressing for an Iran “red line” during his U.N. speech. So far, it looks like the equities are working off an overbought condition and consolidating as the bulls look to convert and hold the 1450 area.

Earnings:
9/28 – before the open (AM, FINL, WAG)
Economic data:
9/28 US personal income/spending and PCE deflator (7:30am CT) and Michigan Confidence (8:55amCT)
9/28 – Eurozone CPI estimate (4am CT)
9/28 – ECB’s Asmussen speaks in Berlin (6:30am CT)
9/28 – Spanish bank stress tests due on either 9/27 or 9/28.
9/28 – France to publish ’13 budget
9/28 – China HSBC manufacturing PMI (Fri night)
Sun 9/30 – China manufacturing PMI (Sun night)
10/1 – Eurozone PMI manufacturing (4am ET) and unemployment rate (4am CT)
10/1 – US manufacturing ISM and construction spending (9am CT)

Thursday started with 280k ESZ and 900 SPZ traded on Globex, trading range 1435.40 – 1427.90 / Wednesday’s RTH’s, pit range was 1435.50 – 1424.50, settled at 1426.90 down 10.3 handles. Today’s RTH’s gapped 6 handles higher to 1433.70 – 1433.00 and traded 1434 before stepping lower to 1432 and on to the LOD, 1430.00 at 9:10CT. In the early going, the financials were mixed and the overall market was lacking leadership as traders waited on Spain’s budget report. The spoos traded in a 4 handle range, oddly enough holding the 1430 area which was trading when the US Fed announced further stimuli. As the early headlines rolled out there was little market reaction at the beginning, but the equities firmed up and then spiked higher. Roger_Volz (10:55:13): SPANISH REFORM PLAN EXCEEDS RECOMMENDATIONS OF EU, GUINDOS SAYS…The spoos took out the early 1434 high and popped to 1439.00 at 11:07 and of course AAPL spiked, trading above $678 up $13 on the move. Buy stops above 1440 tripped buy programs 1441.50 by 11:30 and on to 1444.00 HOD before the sideways trade set in. Over at the United Nations, Netanyahu kept the focus on Iran, requesting a “red line” be drawn and crude, up $2, was trading firm throughout the day even as some analysts say that Iran premium was already factored in. The closing imbalance showed 22 of the DOW 30 for sale and the broader market showed $680M for sale. On the 3:00 cash close the SPZ traded 1441.50 before settling at 1441.10 up 14.2 handles on the day.

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CONTRIBUTORS’ CORNER
SPX CHARTS

Rich Chappell, Channels & Patterns

(9-27) SPX broke below the middle bollinger band on the daily chart yesterday and ES has been bouncing overnight. That looks like a bear flag so far, and we’ll see today whether the middle BB at 1437.67 SPX and the rebroken SPX pivot at 1440 SPX can now hold as short term resistance. It’s worth noting from the chart that the daily RSI is now almost back to 50. In a strong bull trend the 45-55 area acts as decent support as I’ve marked on the chart, so we are now in the likely reversal zone here for a reversal back up if this is just the retracement on equities that I think it is:

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