Posted 9:30 AM ET – Now we know that the market rally is running out of gas. This week the biggest tech companies reported earnings and the results did not excited buyers. Expectations were extremely high and earnings estimates had been ramped up at a pace that we haven’t seen in many years. The results were excellent, but the news was already priced in. This morning the S&P 500 is down 25 points before the open.
Amazon was the last of the tech giants to report and the results (although excellent) missed expectations. They also said that the comps will be more difficult because we are through the pandemic. Consumers are likely to spend their money eating out and traveling. Amazon admitted that it has benefited from the virus shutdowns and it does not have that tailwind.
Apple, Amazon, Facebook, Google and Microsoft comprise more than 20% of the S&P 500. These 5 giants are all down after reporting earnings. In my pre-open market comments I have been mentioning that the “air will get let out of the balloon”. I’ve also been mentioning that these companies have not been impacted by labor shortages, higher raw material costs and supply disruptions like the rest of the S&P 500. I believe the back half of earnings season will do little to excite buyers.
Chinese stocks have been pounded this year and they are in a bear market. Even before the Communist Party cracked down on tech companies, the warning signs were apparent. Their economic recovery has been slower than expected and they have a 10 month head start on the rest of the world. China has been the global growth engine for the last two decades and this is a longer-term market concern. Two decades of hyper growth breeds excess and inefficiency.
It’s not currently a concern, but the U.S. Treasury will run out of money in three months if the debt ceiling is not extended. Politicians are printing money like mad and both parties are likely to hit a roadblock this fall.
Economic data points have been good, but not exceptional. GDP increased 6.5% and 8.5% growth was expected. Next week ISM manufacturing, ISM services, ADP and the Unemployment Report will be posted.
Swing traders with a 3 to 4 week time horizon should be sidelined. This is an extremely low probability trading environment and we need to patiently wait for a market drop that lasts a week or more. These quick little dips don’t truly test buyer conviction. A more sustained decline will help us identify true support and it will give us time to find the best candidates and to enter those trades. Short term swing traders can take advantage of these dips but you need to wait for a drop to the 50-day MA.
Day traders should wait for signs of support this morning. Global markets were weak and I believe it will take time for the bid to strengthen. That means a gap reversal (consecutive long green candles stacked one on top of the other right on the open) is unlikely. If the market tests SPY $436 it will take at least a couple of hours to form a base and to provide us with a buying opportunity. Wednesday night I recorded a video and I mentioned that it was extremely difficult for me to find stocks that I want to buy. When this happens, it is a warning sign. I will be looking for opportunities on both sides of the market this morning. If the SPY makes a new low for the day after two hours of trading, favor the short side.
Support is at SPY $436 and resistance is at $442.