Posted 9:30 AM ET – The S&P 500 made a new high last week on extremely light volume. We are in a news vacuum and that favors the current upward momentum. These gains can easily be stripped away and longer-term swing traders should be sidelined. This morning the bid will be tested and we will see if the breakout above SPY $442 can hold.
Empire Manufacturing came in light this morning, but it is not typically a big market mover.
China is the “problem du jour” and its economic numbers were soft. Retail sales increased 8.5% in July (11.5% expected) and industrial production increased by 6.4% (7.8% expected). As I’ve been mentioning the last few weeks, China is a red flag. Their stock market is in bear market territory and they have a 10 month head start on the global Coronavirus recovery. Part of their market decline can be attributed to the Chinese government regulating tech companies, but there are other warning signs as well. It is the global growth engine and it should be clicking on all cylinders as the rest of the world reopens. China is the “canary in the coal mine” and I am watching their headlines closely.
The Delta variant is spreading rapidly in the US and vaccinated patients are catching the virus. Many states/cities are shutting down and the travel/restaurant industry is restricting service for non-vaccinated patrons.
Corporations are flush with cash and on average they have 45% more cash holdings than they did a year ago. Almost $7 trillion sits on the sidelines and that tells me that they are preparing for a soft patch.
The Fed does not plan to reduce asset purchases until the middle of 2022 and that is extremely dovish. I don’t believe that the FOMC minutes Wednesday will reveal anything new.
Swing traders with a 3 to 4 week time horizon should wait patiently for a market decline to the 50-day moving average. That is the first resting point. This is a low probability trading environment and I don’t see a catalyst to push the market higher. Earnings season is over and the economic news is light. There are a few potential “flies in the ointment” and I believe that the market is completely discounting the impact from the Delta variant and it is not questioning soft results in China. Option implied volatilities are low and premium sellers are not properly rewarded for taking risk. Premium buyers are vulnerable to time decay and we don’t know when the breakdown will occur. These are the dog days of summer and I am glad I took the last week off.
Day traders also need to be cautious. The tiny bodied candles on the daily chart of the S&P 500 indicate that the market is likely to close near the open. If intraday prices drift too far from the opening price, a reversal becomes more likely. Each day there are pockets of strength/weakness and Option Stalker helps us find these stocks. My objective is to find a few good trades each day and this will be my goal for the rest of the month. Reduce your trade count and your trade size. Don’t piss your capital away in this low probability environment.
Support is at SPY $442 and $445. Resistance is at the high from Friday. Overseas markets were a little soft and this opening round of selling could take an hour or more to work off. Wait for support and use the first 30 minutes to find relative strength.