Mid-Month Equity Rebalance Leads to Stock Selling

This article was originally published on Nadex.com.

Overnight, Asian stock markets had a lower tone, including the three majors. Meanwhile, broader European markets have also experienced a weak trade this morning, even though the three majors are modestly higher.

Today’s economic calendar, shown below, features the housing numbers during the pre-market period at 8:30 a.m. However, the rest of the scheduled releases are not expected to be market moving as the morning continues.

The two days of selling in the U.S. equity markets, which amounted to about 1.66% in the S&P 500 futures from Monday’s high to Tuesday’s low, likely represent some mid-month rebalancing and profit-taking. The personality of this market continues along the lines we have been seeing over the last several weeks - that is, every time equities appears to be getting ready to really take off higher, they sell off, and every time it seems the bottom will fall out and lead to a retest of the winter's lows, buyers come in.

Following an eight-day winning streak for the equity indices, some profit-taking was reasonable; but now what? We believe bulls need to hold the 2700 area, not only because that number was yesterday’s low or because it is a big round number, but also because other technical indicators suggest 2700 as a pivotal level.

If bulls can control that price level, then the door will be open to retest this week’s high of 2741.25, then 2750 and up to 2775 in the days to come. However, should that level fail, we would look for a test of 2675.

Bulls still have the lower volume trend in their favor, which we expect to continue after the 9:30 a.m. EST open today, through this May and into June.  The calendar today is light. This means that as long as price is above 2700, we are looking for it to drift higher, and only want to be long.

One last thing we want to keep an eye on is the North Koreans’ potential withdrawal from the summit scheduled with the U.S. While theoretically this wouldn’t always be a major market mover, we can never exactly anticipate the role these types of headlines will play.

Today’s Economic Calendar

  • MBA Mortgage Applications 7:00 AM ET
  • Housing Starts 8:30 AM ET
  • Raphael Bostic Speaks 8:30 AM ET
  • Industrial Production 9:15 AM ET
  • Atlanta Fed Business Inflation Expectations 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • James Bullard Speaks 6:30 PM ET

 

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