T2108 Update – The Countdown To “Fedaggedon” Begins In Earnest

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 14.3%
T2107 Status: 19.8%
VIX Status: 27.8
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #11 below 20% (oversold), Day #12 under 30%, Day #35 under 40%, Day #75 under 50%, Day #92 under 60%, Day #290 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
One of the many urban legends on Wall Street involves trading after the U.S. Labor Day holiday. Supposedly, traders and major investors take the summer off, commonly defined as the period between Memorial Day in late May and Labor Day in early September. During this period, liquidity is poor and the market gyrates aimlessly and unprofitably. Once the big guys, the “serious money”, return after Labor Day, we get a true feel for the market’s inclinations. I last covered the data on this trade way back in 2007 on my old site, so it is due for a SERIOUS update. Here are the most relevant conclusions from that time:

The performance of the S&P 500 for the year up to Labor Day is very highly correlated with the year-over-year performance of the index. In other words, if the S&P 500 is positive for the year up to Labor Day, then we are almost guaranteed to have an up year overall. This correlation is far more important than the daily trade the day following Labor Day.

The relationship of the one-day post-Labor Day gains to other time periods of the year has been remarkably consistent throughout 44-year sample.

The market tends to perform better over time than the single day trade on the day following Labor Day. Of course, the longer the time frame, the more likely performance will exceed that of any given day.