Posted 9:30 AM ET – Yesterday I started to take a swing position in the S&P 500. It is always important to have a longer term thesis and when you start looking farther out in time, fundamentals come into play. I did not care about the market drop late in the day Tuesday or the negative initial reaction to MSFT earnings. This was a longer term position and I was willing to take some heat as support formed. I plan on holding this core position into the FOMC statement today. It will not impact my day trading and I will continue to look for opportunities long and short. I will NOT have short term positions on during the statement.
Here is my thesis and why I liked this entry point. Monday I saw a big bounce off of the low with late day buying. Tuesday the market made a higher low and I that confirmation prompted me to start taking a bullish swing position from a technical standpoint. SPY $429 was a significant support level and 12-year bull markets die hard. I don’t see an imminent threat of a credit crisis and that is one of the only things that can cause a sustained market decline.
In that context, money has to go somewhere and there is a ton of it out there after all of this money printing. Bond yields are still at historic lows and fixed income is producing negative real returns (yield – inflation < 0%). Where is all of that money going to go? Corporations continue to buy back shares aggressively. They are selling cheap debt (bond offerings) and they are using the proceeds to buy back shares. AAPL has repurchased 25% of its shares outstanding in the last 5 years. More cash from money printing, few alternative investments and less shares to buy = higher prices. These are incredible forces. My thesis is that the market is going to establish a range this year and it will spend time in that range while earnings/valuations catch up. I believe we are currently at what will be the low end of the range and this is where I want to start buying. I also feel that the Fed is going to be as dovish as they possibly can be today. Yes, rates are going higher, but if they said they are hiking .5% in March with a one and done message, I think stocks would rally on that news.Swing traders who are on the sidelines should buy SPY (½ position) with the intent to add if SPY opens > $442 (200-day MA) Thursday. You can also sell out of the money bullish put spreads to take advantage of high IVs and time decay. This strategy will give you some cushion in case the market tests support again. Go light today and add Thursday after gauge the overnight Fed reaction. We did not get the capitulation low I was looking for so a retest is possible.
Day traders look for an early test of the 200-day MA. I am expecting a gap and go so look for stacked green candles early. Overseas markets were strong. Buyers are back and the 200-day MA is a natural resting point into the FOMC statement. Tech stocks are particularly strong this morning and we could see some big moves there. Many are bouncing from low levels and they have lots of room to run. I would focus on those that have broken through downward sloping D1 trend lines or rallied above major moving averages. Sellers are not going to go away quietly. Once that initial run stalls, the bid will be tested. We should have brisk trading for a few hours and then the action will die down into the Fed. Use 1OP as your guide and favor the long side.
Support is at $429 and $440. Resistance is at the 200-day MA and $444.