Volatility BACK! We finally saw the first hints of selling Thursday and Friday with the S&P dropping 3.4% Thursday and giving back 0.82% Friday, although they were able to get a chunk of their losses back Friday as the index was down as much as 3% mid-day. That first trendline support in the QQQ kicked in stronger than ever Friday afternoon, when most were at the beach for Labor Day Weekend, and closed 4% off lows. Both lows Friday, the SPY and the QQQ, now become important support areas in the very short term. If we can consolidate around those lows, it can be a buying opportunity somewhat quickly. If we flush through those lows with some velocity and sustain a move lower, it will likely be the start of a volatile month. This becomes an important time to know your support and resistance levels, which we can generally map out by "looking left" on the chart at previously important levels.
Once volatility returns, it generally sticks around for a few weeks. Seasonally, September is generally a very choppy month, with one of the weakest performance of any time period throughout the year, and that goes double for election years, whatever the reason being. I personally believe September will be filled with volatility, especially comparing with the action we've seen over the past few months as stocks have mostly just been grinding higher.
What makes the best traders is their understanding and ability of when to "turn it on and off." This relates to risk management, overall aggressiveness in the market, outlook, the trade setups you're taking, the amount of risk you're putting on and the adjustments you're making. We just had a period of stocks goign straight up for weeks on end, and we finally have these first hints of selling. Of course we could bounce Monday and be right back in that hyper uptrend -- but something tells me the easy money has been made for a little bit. With things sloppy and wide after Thursday/Friday action, will likely be more active in the latter half of the week as the dust settles. Definitely expecting the daily ranges of stocks to be greater than what we've seen going forward the next few weeks as volatility is back.
My macro outlook is pretty simple for the months ahead. This is all personal speculation so nothing is set in stone here. Going forward I'm anticipating September to be choppy and difficult as I've mentioned a few times already. I believe we could definitely see more selling from here, maybe the growth stocks continue to come in and we'll probably see a short lived rotation into the value names of the S&P. These are of course the industrial, energy, material, utility, discretionary type stocks.
After the period of chop is behind us, i believe the money will rotate BACK to the growth stocks in a big way. I believe we're in a secular bull market and haven't seen any fundamental changes to the current environment to have me believe the status quo will drastically change --- other than "things are too high," which is all relative.
Overall, I'm definitely in the camp that things have been flying too high and have been a bit vertical so they could use some consolidation which is why I'm anticipating September to be tough. That being said, with the Federal Reserve's backstop we currently have in place, to pump trillions into the market, I don't believe anything has fundamentally changed to the macro environment. The election will be a headline risk of its own, but that's something to address when its upon us. My macro outlook for the next year (currently, with no changes to the status quo) remains actively bullish.