Stocks back under pressure; Watch month-end flows?


  • US stock markets to start lower 

  • S&P500 futures back below 2860

  • Will month-end rebalancing come into play?


After pushing up to their highest level of the week, US equities fell back into the cash close yesterday evening with the markets still consolidating after the recent declines. There’s been some further selling seen this morning as European benchmarks have come back under pressure with the German Dax down by a little over 1% at the time of writing. There’s been some risk-off moves seen in bond and precious metals too with Silver on the rise once more and Gold trading back up towards the high seen on Sunday night/Monday morning.

Little has changed overall for the chart structure of the S&P500 in the past few weeks with the market continuing to respect the broader range from around 2814-2944. Closer to the current price Friday’s closing level of 2847 still represent an unfilled gap (in cash hours). Source: xStation


As we approach the end of August it is worthwhile being on the lookout for potential month-end flows. There can often be moves that are otherwise unexplained in the last few trading sessions of the month, caused by funds repositioning there portfolios. One key thing to look for is the performance of stocks relative to bonds during that period, as a large divergence suggests a great rebalancing impact. US bonds have outperformed US stocks by 6.3%pts in August which would by the 9th best month for fixed income compared to equities in the past decade. 


The logic behind this suggests that firms with a fixed mandate Stock:Bond ratio (EG 80:20, 60:40 etc) will now be in a position where they are underweight stocks and overweight bonds. Therefore the rebalance would require the selling of bonds and the buying of stocks. This is not an exact science as some firms have different criteria for rebalancing but could be something worth keeping an eye on in the coming sessions.

The strong outperformance of bonds over stocks so far this month could be seen to suggest that a rebalancing is due and this would see additional buying pressure in equities. Source: Bloomberg     


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