China May Determine Outcome Of 'Sell Rosh Hashanah, Buy Yom Kippur' Strategy

Not all seasonable strategies work to perfection. For example, much of the returns from the January effect are determined by an investor's entry point in late December or early January. So far, that indicator has predicted a down year for the market, although the index traded at much higher levels from February through July.

This year, the "Sell Rosh Hashanah and Buy Yum Kippur" strategy appears to be working, but with a caveat. On the day preceding the first night of Rosh Hashanah (September 11), the S&P 500 index futures ended session at 1950.25.

Ahead of the Fed meeting and the quadruple witch expiration last Friday, the Street was convinced that the Fed would get the first interest rate hike in years out of the way. In anticipation of that, the indexes posted solid gains last Tuesday and Wednesday.

See Also: Seasonal Strategy: Sell Rosh Hashanah And Buy Yom Kippur

When the Fed disappointed by standing pat, the move was cheered then jeered. In last Thursday's volatile session, the index rallied to a post-Flash Crash rebound high (2011.75) before crumbling. After climbing over the psychological 2000 resistance level for the first time since August 21 (the Friday before the Flash Crash), it sharply reversed course to end the session at 1977.25.

Friday's quadruple witch expiration started with the index under pressure and ended that way as well, losing another 27 handles to close at 1950.50. Monday's relief rally has been more than offset by Tuesday's steep decline instigated by worldwide economic growth concerns.

The Elephant In The Room

China may determine the actual outcome of the strategy. When Jews around the world congregate to ask for forgiveness for their sins on Tuesday night and Wednesday morning, the Chinese government will reveal its latest manufacturing PMI reading. The investment world will likely awaken on Wednesday to either huge gains or losses in world bourses.

If there was ever a time for the Chinese government to pull a rabbit out of its hat, it would be right now. With the world focused on the tepid economic growth in China and their indexes unable to distance itself from 18-month lows, a good PMI number is needed (that is, if the data is accurate).

If the Chinese cannot conjure up a good number, the index futures may very well be trading well into the 1800 handle and on its way to revisit the Flash Crash-low (1821.75). If the Chinese PMI improves, all of the gains from this seasonal strategy may vanish.

For now, the best investment strategy (and since mid-August) may be flat, dumb and happy...and for good reason. With the introduction of a new Federal Reserve mandate last week, the global economy, the future course of Fed's action and world's economies remains a mystery.

Joel Elconin is the co-host of Benzinga's #PreMarket Prep, a daily trading idea radio show.

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