Unlike a song with the same title, our "Hold the Line" not surprisingly refers to the S&P 500 Index as it declined down to challenge support at the 50-day Moving Average. It seems the seasonal tendency to decline in September received enough attention by the financial media to turn sentiment indicators negative enough to keep "buy-the-dippers" on the sidelines. The Market Review adds details along with declaring once again, that the odds favor the pullback ending soon.

S&P 500 Index (SPX) 4432.99 slid 25.59 points or -.57% last week closing 3.36 points or -.08% below the key 50-day Moving Average at 4436.35. Three of five trading days risk-off sectors held up better than the more cyclical risk-on sectors led by Energy on Monday and Wednesday.

Although it closed below the 50-day Moving Average as well as the upward sloping trendline, hereby sending hedge signals, odds still favor it holding since it contained the last 9 pullbacks after the October 30 double bottom low. Since support should be considered more like an area than a specific number some latitude should be allowed. However, multiple closes below the 50-day Moving average or a large one-day decline from here on increased volume will swing the pendulum enough to start hedging long risk.

Riding last week's horseracing analogy a bit farther, "if the favorite thoroughbred won its last 9 races, would you bet it to lose the next?" Down below the 50-day Moving Average early in the day, by 2:00 p.m. on Friday, it looked as if support was not going to hold thanks in part to the financial media scaring away "buy-the-dippers" with excessive September seasonal babble along with futures and options trading. At 3:00 p.m., going into the last turn, and below by 1.98 points, hope faded coming into the home stretch, now below by 5.04 points.

At the wire, there could have been a stampede for the exit in the last hour like a wild herd of horses heading for one small gate in the fence. Instead, it finally closed 3.36 points below the key 50-day Moving Average. An exciting race on volume of 3.7 bn shares, the highest since March 19 at 4.7 bn shares during pullback number four of the nine pullback sequence, one that also tested and held the 50-day Moving Average. Noteworthy: March 19 and last Friday were both monthly and quarterly futures and options expiration dates.

Invesco QQQ Trust (QQQ) 373.83 declined 2.76 points or -.73% last week closing below the important upward sloping trendline that began on May 19 at 315.93 and touches the August 19 low at 359.96. However, it's still above the 50-Day Moving average now at 369.63. Following the lead of the SPX odds favor support from the 50-day Moving Average will hold. However, should it continue lower and close below the 50-Day Moving Average and follow the SPX lower, consider hedging long positions.

CBOE Volatility Index® (VIX) declined .14 points or -.67% last week ending at 20.81. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added .19 points or +1.28% to close at 15.09% compared to 14.90% for the week ending September 10.

Our estimate of the mean for the current relevant range that begins on June 5, 2020, at 19.70% and slopes downward, ended Friday at 15.03%, slightly below Friday's close. 

VIX Futures Premium

VIX futures premium on Friday ended at 8.80%, in the yellow caution zone with October the new front-month vs. 1.38% last week before September futures expired last Wednesday. Better than last week, but the faster moving elevated VIX narrows the spread.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications. Last week risk-off rotation into big-cap liquid stocks continued as the index declined 66.04 points or -81% to end at 15.75 while approaching the September 21, 2020 low at 6.03 adding support to the September seasonal weakness narrative.

Another disappointing week for the bulls from this perspective. However, if the SPX follows the 9-pullback script above, "buy-the-dippers" should be alert and get ready this week.

WTI Crude Oil (CL)71.97 basis October futures ended the week up 2.22 points or +3.18% higher. Cash ended Tuesday, September 14, at 70.46 up 2.11 for the week. An updated cash chart:

The most recent top occurred on July 13 at 75.25 just .05 above the previous top made on October 2, 2018, at 75.20. See the two tops in the chart above.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Absent an unanticipated fundamental change (which could occur), odds favor the current pullback ending in the next few days. Perhaps Wednesday after Jay Powell's comments following the FOMC meeting. This week September will soon be winding down and the effect of futures and options trading (positioning) at the end of the quarter will diminish.

However, be ready to hedge individual long positions with option collars if support fails to hold. Should it become necessary hedge the broad market with SPY put spreads or the ProShares UltraPro Short QQQ (SQQQ) described in Digest Issue 34 "Breadth Disappoints [Charts]." 

Summary

Last week the S&P 500 Index failed to hold narrowly defined support at the 50-day Moving Average. Although odds still favor support holding since quarterly futures and options expiration greatly expanded volume and likely influenced closing prices to some extent assisted by the financial media.