Market Should Dip Soon – Use This Options Strategy On Any Weakness

October 28, 2021

Posted 9:30 AM ET – The S&P 500 is at all-time highs as earnings season peaks. The reaction to mega cap tech earnings has been mixed. Bulls will view this as good news because the results have been strong enough to support extreme valuations.

AAPL and AMZN will post earnings after the close today.

Q3 2021 S&P 500 Snapshot Highlights
• S&P 500’s 3rd quarter growth is 31.75% compared to 24.35% a month ago.
• Financials was trending up to 29.66% from 12.31% a month ago.
• Real Estate was trending up to 79.85% from 65.77% a month ago.
84.3% of companies reported have beaten EPS Estimates and 78.3% of companies reported have beaten Revenue estimates, while 66.3% have beaten both EPS and Revenue.

Q3 GDP came in at 2% which is much lower than the 3.2% that was projected. The market did not move after the number.

Reasons to be bullish:

1. Interest rates are not keeping pace with inflation (negative real returns) so investors see stocks as an attractive investment alternative.
2. Corporate buy backs are steady.
3. The long term trend is up and the market formed a base at the 100-day MA.
4. We are heading into a seasonally strong period.

Reasons to be bearish:

1. Stock valuations have not been this high since the 2000 tech bubble.
2. The Fed may start tapering in November.
3. Hourly wages are rising quickly and this will bite into profit margins.
4. Raw material costs are rising quickly and that is inflationary.
5. Global economic growth is sluggish because of supply disruptions.
6. Electricity is being rationed around the globe due to energy supply issues.
7. China is seeing a rise in corporate defaults. This could spark credit concerns.
8. Analysts are downgrading earnings expectations at a fast clip.
9. This was the heaviest selling we have seen in a year.

The reasons to be bullish are winning the battle. Rising inflation, historically low interest rates and a dovish Fed are making bonds an unattractive investment. The printing presses are running full tilt and that money is finding its way into stocks. FB got trashed after earnings so what did they do? They announced a $50 billion share buy-back. Companies have been issuing cheap debt for years and using the proceeds to buy back shares. This might seem insignificant, but trust me it is not. As an example, AAPL has reduced its outstanding shared by 25% in the last 5 years. For the S&P 500 the number of shares outstanding has been reduced by 50% in the last decade. On a short term basis, that buying supports the stock. On a longer term basis extreme liquidity (from constant money printing) results in mountains of money chasing fewer shares (tighter supply of shares and increasing demand = higher prices). These are powerful forces and it explains why we do not see any big market declines.

A big credit crisis is the only thing that can topple this market and I do not see one… yet. China is worth keeping an eye on. An interest rate spike would also be problematic for the market, but that would take time to unfold. Right now the prevailing thought is that inflation will be temporary. If that changes we could see that spike in yields regardless of Fed policy (the market will force the Fed to raise rates by selling bonds).

Swing traders should wait for the FOMC reaction next week. I am expecting a dip in the next week or two once all of the mega cap tech earnings have been posted. Sell bullish put spreads on any weakness.

CLICK HERE TO WATCH THE VIDEO I RECORDED LAST NIGHT

Day traders need to look for two-sided action. There have been nice opportunities on both sides of the market. I don’t expect to see any monster bullish trend days like we had last week. Set passive targets and know that the market will reverse when the current momentum runs out of steam. Buying dips once support has been established is the best day trading approach because you can join the longer term market uptrend. Yesterday was a classic example of the price action we are likely to see today.

Support is at SPY $454. Resistance is the all-time high.
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