Posted 10:30 AM ET – We are likely to see nervous jitters for a few more days and then I am expecting a relief bounce after the FOMC statement. Notice that I used the word bounce, not rally. There are still many unresolved issues that will weigh on the market this summer. The low for the SPY in 2022 was $410.60 and I believe we will test that before the FOMC statement Wednesday.
There are many positive and negative influences and that is creating extreme market volatility. Buyers flex their muscles and buy programs kick in. The next day sellers take control and the bottom drops out.
On the negative side of the ledger we have a 50 basis point rate hike ahead of us and another 50 basis point hike likely in June. The Fed’s balance sheet run off is at twice the expected rate. The war in Ukraine will impact food and energy prices and inflation is hitting levels we have not seen in 40 years. China is battling Covid-19 and Beijing is heading into lock down. China’s manufacturing PMI came in much weaker than expected and it is solidly in contraction territory.
On the positive side of the ledger, we have strong earnings releases so far. I know it does not seem like it. Here are some statistics. The blended earnings growth rate for Q1 S&P 500 EPS currently stands at 7.1%. This compares to the 4.7% expected at the end of the quarter. The blended revenue growth rate is 12.2%. Of the 55% of S&P 500 companies that have reported for Q1, 80% have beaten consensus EPS expectations. In addition, 72% have surpassed consensus sales expectations, below the 78% one-year average but above the five-year average of 69%. In aggregate, companies are reporting earnings that are 3.4% above expectations. Corporate buybacks are at record levels. Mountains of cash on the side line and less shares outstanding will eventually lead to higher stock prices.
Swing traders with a 3-4 week time horizon should wait patiently in cash. Our moment will come after the FOMC meeting if we get the bounce I suspect. We are likely to sell out of the money bullish put spreads on strong stocks to take advantage if inflated option implied volatilities. Keep searching for stocks that have excellent earnings reactions and relative strength. A 50 basis point rate hike is expected and the market is expecting a 50 basis point rate hike in June. Once this news has been released, we should see a relief rally like we saw in March. We are not going to predict a bounce, we are going to wait for it and then place some short term swing trades. If we don’t get that bounce, we will wait.
Day traders need to confirm market support. The selling pressure has been extreme the last two weeks and we should not expect a significant bounce until the downside has been tested. I will be watching for a double bottom higher low or stacked consecutive long green candles (at least 3 and do not bite on “solos”). Overseas markets were mixed so I am not seeing much of an influence there. Short term traders with overnight shorts should consider taking gains ahead of the FOMC. Traders will be squaring up ahead of major news and things will quiet down Tuesday and Wednesday.
Support is at the low from Feb $410.60). Resistance is at $416 and $429.