A Seasonal Tug of War

September 28, 2009

The transition between quarters is typically a propitious period, however, if selling activity continues, there will be growing concern that the market has hit the wall.

It is going to be an interesting week of trading...or so we think.

Last week the S&P 500 experienced only its third weekly decline in the last 11 weeks. It was a 2.2% drop that came in the midst of some weaker-than-expected economic data, an entirely expected FOMC decision, and some surprising revelations about Iran's nuclear capabilities. It was the largest weekly decline since a 2.45% decline for the week ended July 3.

Of course, I would be remiss if I did not add that the S&P 500 was up 2.45% and 2.59%, respectively, in the preceding two weeks, so it can't be regarded at this point as anything more than a normal occurrence of profit taking.

It is that last thought that makes us think it will be an interesting week.

We'll see both the end of a quarter and the start of a new one, two typically propitious periods in an upward trending market. Should the selling activity continue, there will be growing concerns that the market has hit the wall and could perhaps be subject to a more meaningful pullback.

Sentiment readings, however, still aren't at extreme levels on either the bullish or bearish sides of the aisle. That suggests further consolidation from here could be driven more by a time parameter than a price parameter (i.e. there is potential for a primarily lateral move).

Seasonal activity (end of quarter; "sell Rosh Hashanah, buy Yom Kippur") is likely playing some part in the early bias, although the basis for the move looks to be additional M&A activity that is feeding the sense that life in the financial economy is getting back to normal, even if the real economy continues to lag behind in that pursuit.

The two deals of note today include Abbott Labs (ABT) buying the pharmaceutical arm of Belgian conglomerate Solvay for nearly $7 billion in cash and Xerox (XRX) acquiring Affiliated Computer Services (XRX) in a $6.4 billion cash and stock deal.

Notably, the price Xerox is paying translates to a 34% premium for ACS shareholders based on Friday's closing prices.

Acquisition premiums have been inconsistent the last several weeks, yet recently they have been quite robust, which is a point that hasn't gotten lost on the speculative crowd. Fittingly, we are starting to hear rumors of possible M&A deals pick up along with the premiums being paid.

The prospect of further M&A activity should be a supportive factor for the market in the near-term.

Separately, the economic calendar should hold some trading sway this week. There are a number of influential releases on the docket, the most important of which is the September employment report that comes out before the open on Friday.