U.S. equity markets entered into a corrective phase on August 2 that is expected to last until at least the first week in October. Between now and then, a series of events are expected to dampen investor interest in U.S. equities. The correction is following a historic pattern at this time of year.
U.S. equity markets must face several difficult events during the next eight weeks. Roadblocks include rumours that the Federal Reserve is about to begin a tapering program that will reduce monetary stimulus, the debt ceiling debate to be concluded before the end of September, hurricane season that peaks near the end of August, higher interest rates, higher energy costs and declining earnings and revenue guidance by major U.S. companies. More news on the Federal Reserve's plan on tapering could come as early as this week when Federal Reserve officials meet at Jackson Hole, Wyoming, for their annual economic conference. More news on declining corporate earnings and revenue guidance could come this week when several key retail merchandisers including Best Buy, TJX Companies, Home Depot, Lowe's and Target release second quarter results. Last week, Wal-Mart, Macy's and Kohl's lowered guidance to the end of the year due to lower than expected consumer spending.
Weakness in U.S. equity markets is a usual occurrence at this time of year. On average during the past 20 years, the Dow Jones Industrial Average has declined 5.0 per cent from mid-August to the end of September. Weakness has been notable during post-U.S. presidential election years.
On the charts, the S&P 500 index at 1,655.83 showed technical evidence of the start of a correction last week. The index peaked on August 2 at 1,709.67, then fell below its 20-day moving average last Wednesday, dropped below short-term support at 1,676.03 on Thursday and closed below its 50-day moving average on Friday. Downside risk is to support at its June low at 1,560.
Seasonal investors can take advantage during the corrective phase either by shorting U.S. equity index exchange-traded funds or by acquiring ETFs that trade inversely to their index. U.S. exchanges list 18 ETFs that trade inversely to their index. The most aptly designated inverse ETF for this time of year is ProShares Short Dow 30 ETF with the symbol DOG-N. Other actively traded inverse ETFs include ProShares Short S&P 500 (SH-N), Proshares Short Russell 2000 (RWM-N) and ProShares Short QQQ (PSQ-N). Also, Horizons offers the BetaPro S&P 500 Inverse ETF (HIU-T) that trades in Canadian dollars and is hedged against U.S. currency risk.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and exchange-traded funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.