9-24-24: Another All-Time High, Now What?

by Ivan Martchev

September 24, 2024

The S&P 500 Index made an all-time high last week, partially driven by an overzealous Fed, as it “recalibrated” its unreasonably hawkish policy, but also by the realization that spending on AI data centers is just ramping up (that was the main market catalyst the week before). I have seen very strong Septembers over the years, even though September remains the weakest month of the year. The last strong September that I remember was in 2018, but it was followed by an extremely weak October.

Can September finish on a strong note this year? We have about a week left to get the answer.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Anything is possible, but I am not sure it is probable this time. The September rally over the last two weeks has been very sharp, similar in nature to the August rally the month before. The reason for such sharp moves is the short squeeze that is feeding them, resulting from the selloffs in early August and first week of September. At a minimum, we need some type of sideways action, similar to what we saw in the last two weeks of August. Whether we move up or down depends on many factors. The S&P 500 cash index needs to hold near the 5,600 level on any pullbacks, which is basically the lows of last week.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Many have noted that the S&P 500 made an all-time high last week, but the NASDAQ 100 did not. I am not sure that is a bad thing, as the overall breadth of the market has improved, which is always a positive. There is a rotation out of tech into the broader market. How long it lasts is hard to say. In late July, it lasted only a couple of weeks. It appears that the NASDAQ 100 is in some sort of a trading range, and I would not be surprised if that trading range resolves similarly to the way it did from August to October of last year (see chart, above). If the NASDAQ 100 does what it did last year, in about the same time frame, then the present all-time high in the S&P 500 would be what traders would call a “false breakout”.

There is a wild card that is hard to predict, which may prevent a further rally. The geopolitical situation is rapidly deteriorating. The war in the Middle East looks like it will go regional, with pagers and walkie-talkies exploding in Lebanon in a surreal fashion reminiscent of a James Bond film.  This escalation has not run its course, and who knows where it will end, but I seriously doubt it will stop here. More action is expected there in the next 4-6 weeks, which can move both oil and financial markets. Also, no one can be sure what will happen next in Ukraine, but both sides need good weather to move their heavy military equipment, and good weather has less than two months remaining in that part of the world.

Even though September tends to be a bad month, seasonality in September is not evenly distributed. Market watchers have gone so far as to calculate that the last 10 days in September are the worst, which is basically this week. Seasonality patterns in presidential election years tend to be different, with October generally not a bad month overall but exhibiting much weaker seasonality during election years.

In other words, the rally in the past two weeks has been impressive, but it is coming up against the weakest seasonality of election years, while hard to predict factors like geopolitics are showing signs of rapid deterioration. One thing I have learned about geopolitical threats is that the stock market ignores them until the last minute and when they exhibit a worst-case scenario, the market reacts more violently.