Nice Market Bounce – A Drop and Retest of Support Likely Next Week

Posted 9:30 AM ET - The year-long market rally remains strong and every dip to the 50-day moving average has been a buying opportunity in 2021. Buyers scooped stocks Thursday and we are seeing follow-through this morning. Global markets were strong overnight and that is setting a positive backdrop. I still believe that the headwinds are blowing and that a retest of support is likely in the next week. Nibble, but don't chase. It's important for us to watch what's happening around the rest of the world. China has been the global growth engine for the last decade and there are signs of stress. China's market is officially in bear market territory (-20% from the high). They emerged from the virus eight months ago and they should have a full head of steam as the rest of the world reopens. When I see a "disconnect" like this it raises concerns. Decades of hyper growth breed excess capacity and poor lending practices. This market drop has presented some excellent shorting opportunities and China is on my radar. I believe it is the cornerstone to a global economic recovery. Inflation is starting to surface and the CPI and PPI were both "hot" this week. The price of raw materials is increasing and labor costs (the largest input expense) are also rising. In last Friday's Unemployment Report hourly wages increased .7%. Companies are having a very difficult time finding workers and McDonald's is raising their minimum wage to $16/hour. US 10-Year Treasuries are declining and interest rates are inching higher. The Fed has repeated that they will not tighten anytime soon and many analysts believe that they are underestimating inflation. We need to keep a close eye on TLT. It is tests the low it will put pressure on the market. Economic growth has been strong, but this morning’s retail sales number was very light. Analysts were expecting a 1% increase and retail sales were flat (0%). Where is the pent-up demand? We know that almost $2 trillion sits on the sidelines. Inflation without economic growth is a bad combination. I advised swing traders to sell some bullish put spreads yesterday. Out of six possible trades we were filled on five of them. I'm happy with our current exposure and I'm not ready to buy SPY here. Selling out of the money bullish put spreads gives us breathing room and we can take advantage of accelerated time premium decay. I like focusing on basic materials since they will benefit from higher prices. One of the easiest trades has been to buy when the SPY tests the 50-day moving average. Bull markets diehard and I expected a bounce after Wednesday's drop. Unfortunately, I don't believe that the market will have a sustained rally until that support is confirmed. I am looking for a retest of the low next week and I believe there is a chance that we may breach it. That is why I did not suggest buying SPY yesterday. Inflation is not one of those things that will go away quietly and I believe it will keep a lid on the market this summer. I also watched the market reaction when it got a dose of exceptional news the last few weeks (earnings, Fed and economic). Buyers were passive (light volume) and the market was not able to break out. I'm not bearish, just cautious. Fantastic news is priced in and I believe that the market will trade and arrange between SPY $400 - $420 for most of the summer. Day traders should go with the flow. We've seen incredible rotation between sectors and Options Stalker searches have put us on the best stocks. Heavy Buying/Selling and Red-Hot/Ice Cold have been two of my favorite searches recently. I still prefer to trade the short side because I'm finding much better price action. I've been able to latch onto weak stocks and ride those moves most of the day for whopping gains. In the last two weeks technology stocks and Chinese stocks have been trashed. Of course there are exceptions, but we don't get the same type of price action on the upside. Stocks that are rallying make tenuous moves and there are plenty of dips along the way. I find myself sitting passive targets when I buy. My favorite Option Stalker search on the long side is Short Squeeze and AMC was a nice one yesterday. Overseas markets are providing a positive backdrop today, but the retail sales number could temper enthusiasm. Look for two-sided action today and a fairly wide range. Support is at SPY $404, $410.50 and $412.50. Resistance is at $416 and I don't believe we will see that level today. . .

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