Posted 9:30 AM ET – The price action today will be very revealing. Yesterday a long term market uptrend was preserved. Typically, these bounces have provided a springboard to a new all-time high. If the price action is bullish today we can expect higher prices. However, if the market easily gives up its gains from yesterday we know that the second shoe is about to drop and we could take out that major support level in the next few days.
After a monster rally from the 2020 lows every dip has been bought with a vengeance. The dips barely last a few days and that has been a sign of market strength. When this pattern fails it will be a warning sign.
The Evergrande collapse (Chinese real estate giant) is a problem and they are likely to default on an interest payment due next week. China has been on my radar for months and I will be watching for other defaults. No one knows to what extent the Chinese government will help out (if at all). Their market was down 1.5% overnight.
Yesterday the CPI came in at .3% vs .5% expected. That will give the Fed some breathing room and it is bullish for the market today.
Reasons to stay long:
1. Central bank money printing has pushed interest rates to historic lows and bond yields do not keep pace with inflation (negative real returns).
2. All of this money has to go somewhere and stocks are still the best alternative.
3. Corporate buybacks are reducing the supply of stock. Lower supply and higher demand means higher prices.
4. Economic numbers have been solid (although slightly below expectations).
5. The upward momentum is very strong and the dips are shallow and brief.
Reasons to be careful:
1. The forward P/E on the S&P 500 is at 21 and the last time it was this high was in 2000 before the “tech bubble”.
2. Earnings comps will be harder to beat because we were starting to rebound from Covid a year ago.
3. September is a seasonally weak month.
4. The Fed will start tapering in 2022. Europe will start sooner and S Korea raised rates a few weeks ago.
5. VIX is low and that suggests that Asset Managers are unhedged. Big drops happen when no one is expecting them.
6. Covid is hampering global growth.
7. There have been seven consecutive higher monthly closes on the S&P 500 and in the last 25 years there have not been eight.
8. We have seen selling pressure the last week. The market is opening on the high and closing on the low (red candles). That is a bearish pattern.
9. The debt ceiling needs to be raised by Sept 30th and Republicans are digging their heels in. This will come down to the wire and the market won’t like it.
Swing traders with a 3-4 week horizon should stay sidelined. This is a seasonally weak period and I believe risk is elevated.
Day traders watch carefully. This is where the rubber meets the road. The market should be able to rally after a strong bounce off of support yesterday. If the bid is tested and we grind higher into quad witching, it is business as usual. Typically the price action yesterday would have resulted in an opening market gap higher today with a potential “gap and go”. We are not seeing that today and that is a warning sign. If the market reverses the gains from Wednesday with ease it will be a sign that sellers are still in control and that at very least the 50-day MA will be tested. I am leaning in the bearish camp and in my opinion the dark clouds fundamentally are mounting. Tread cautiously today. The outcome will determine market direction for the next few weeks.
Support is at SPY $440 and $444. Resistance is at $450 and $453.