PreMarket Prep: Putting A Bow On The S&P 500 In Q3

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

There are some positives about the price action in the third quarter in the S&P 500 index and there are some negatives.

Mixed Signals: Let’s start with the positives. The cash index was higher for the sixth quarter in a row. At its its peak, the S&P was higher by 21% from its year-end close to its peak in September. Also, several issues made new all-time highs and many by a wide margin.

Now the negatives. The index retreated from the high and barely closed in the green for the quarter (4,307.54 vs. 4,297.50) after a poor showing on Thursday. That decline trimmed the yearly gain to 14.6%, which is still an above-average year.

Also, two of the months (August and September) were in the red. Along these lines, the last time the index had three consecutive down months in a row was back in the turbulent times of January-March of 2020. Of course, that was during the early stages of the pandemic and is unlikely to occur again in the near future.

To Buy Or Not To Buy The Dip?: Every correction since over the last six quarters has been a buying opportunity, so why would this be decline be any different? At this point, there is no indication based on second-quarter earnings that corporate profits have peaked or have begun to decline.

Keep in mind: that could change when third-quarter earnings begin in earnest Oct. 14, when the first of the top components in the index, JPMorgan Chase & Co. JPM reports.

Based on the performance of the stock in a down market this quarter, investors are anticipating good results. On a closing basis, the behemoth bank gained 5.2% ($155.54 to $163.69). All of the gains were made in the last two weeks of the quarter as the issue bolted from $152.69 to a new all-time high at $169.30 in only five sessions. The issue posted its all-time closing high Sept. 27 at $166.98.

The Elephant In The Room: Runaway inflation that would lead to higher interest rates. The main concern of investors is that the Federal Reserve Bank is underestimating the rising rate of inflation.

Most of the declines in the market as of late have come on the heels of data that indicates the Federal Reserve is underestimating the future rate of inflation.

News Flash: Due of the burgeoning debt of the U.S. government, even an incremental — let alone a rapid — increase in rates would further bankrupt our country. More importantly, increasing rates may stymie the rebound from the economy coming out of the pandemic.

The Market Moving Forward: Based on the price action Friday afternoon, the “buy the dip” crowd prevailed in the premarket and has done the same in the regular session. After the gains off the open, induced by Merck Inc. MRK and its new COVID-19 antiviral, eroded, the index has rebounded and was positive by 1.15% at the close. We are off to a good start. 

Of course, one day does not make a quarter, but if the index can digest the recent sell-off and ramp-up in volatility subsides, strong third-quarter results may propel the index back to its all-time high and beyond.

If the index falters next week, investors may want to prepare for a deeper and more prolonged retreat in the index.