Posted 9:30 AM ET – Today the FOMC is likely to announce the reduction in US Treasury purchases. Tapering is the first step towards tightening and traders will be looking for hints on how worried the Fed is about inflation. Central banks around the world are playing “chicken” with inflation. None of them want to tighten, but most of them are considering it as yields rise.
The spike in prices (wages, oil, ore and food) is pushing real yields (interest rates minus the inflation rate) further into negative territory and that makes stocks attractive on a relative basis. I suspect that when a central bank in a developed nation hikes, the others will follow.
ADP announced that 541K new jobs were created in the private sector during the month of October and that is better than the 400K that was expected. ISM manufacturing was strong this week and ISM services will be posted after the open today.
China’s leaders (Xi and Li) have both suggested that economic growth is slowing. Official PMIs have been in contraction territory the last two months and the spread of Coronavirus has not been this high since the outbreak in Wuhan. Real estate developers are on the ropes and it is difficult for them to secure financing and a handful of them are on the brink of default. This backdrop will NOT improve as China considers property taxes (they do not currently have them). Electricity is in short supply and it is being rationed. China accounts for 30% of the world’s manufacturing and this is significant in terms of supply disruptions. Chinese leaders are urging citizens and provinces to stock up on food (shortages expected). This is a very bearish backdrop for the second biggest economy in the world and the global growth engine for the last two decades. This might be the year of the ox, but I smell a rat.
Stock valuations have not been this high since the tech bubble of 2000. Earnings have been solid, but year-over-year comps will be harder to beat.
Swing traders can sell out of the money bullish put spreads on strong stocks on dips to the 50-day MA. Any drop to that level will be brief so be ready. Seasonal strength will keep buyers engaged and I do not see a threat of a credit crisis into year end. I would not be overly aggressive.
Day traders will benefit from a drop on the open. In a bullish market this is the best day trading scenario. It gives us time to evaluate stocks and relative strength is easier to spot. Look for stocks that are moving higher as the market searches for support. If the market has strong momentum (consecutive long green or red candles) after the FOMC statement, join that move after 15 minutes. If there is any retracement in the candles or any mix of green and red, stay sidelined. Expect a dull day into the FOMC statement. Trim your size and trade count.
Support is at SPY $460 and $456. Resistance is at $470.