Neither side has the power to push the market out of its current range.
PRE-OPEN MARKET COMMENTS TUESDAY – Last week the SPY tested the 200-day MA and it bounced off of that technical support level. During the last round of selling, the price action on the way down was tenuous. That was a sign that buyers were engaged. I still believe the market is in a bottoming process where we will see more of a horizontal range. That could last through the summer.
ISM manufacturing was a little light last week, but ISM services came in at 55.1 which is a strong reading. Last week, China’s PMI hit the highest level in a decade (52.6). That is squarely in expansion territory, but much of that rebound is due to pent up demand during their Covid-19 shutdown.
This week we have the ADP and the jobs report on Friday. I am expecting good employment since initial jobless claims have been low the last four weeks. Does that mean the market will rally on the news? No. The Fed has been leaning on strong employment to justify their aggressive tightening. Strong jobs reports increase the chances that they will stay on the tightening path. The good news is that the economy has been able to shoulder the interest rate hikes so far. The key to the jobs report is hourly wages. If they come in higher than .4%, that will be bearish for the market. This is the largest input cost for companies.
Speaking of inflation, the CPI will be posted in a week (March 14th). That will be closely scrutinized and it is the next potential market speedbump or catalyst for a bounce.
The ECB is likely to raise 50 basis points on March 16th.
Today and tomorrow, Fed Chairman Powell will testify before Congress. I don’t believe we will hear anything new. This is just Congressional grandstanding. “How can you justify raising interest rates when my poor voters can’t pay their credit card bills?” The next FOMC statement is March 22nd and the consensus if for a quarter point rate hike.
Earnings estimates for the S&P 500 have been lowered to $223 for 2023 according to Fact Set. This translates into a forward P/E of 18 and that is fairly “rich”. Stocks will need time to grow into current valuations.
Swing Traders, we will stay long the core position from SPY $409. The market tested the 200-day MA and it bounced. It could be tested again in the next two weeks. The CPI and the FOMC statement will be important. I am still neutral to slightly bullish. I favor selling out of the money bullish put spreads and I really like selling OTM naked puts on stocks I want to buy. That is a way to generate income while the market is in this bottoming phase and the strategy will force me to buy stocks I want to own at lower prices. That is one method for gradually scaling into long positions.
Day traders should expect a dull trading. The market tested the upside yesterday and the follow through buying ran its course mid-day. Those gains were erased and the SPY closed right where it finished last week. The major moving averages are converging and the $395 level is significant support. I don’t sense that sellers have the power to push the market below that level and I don’t believe buyers have the power to push us through $416 without help from the Fed or the inflation numbers. That means we are stuck. Each day we are in “wait and see” mode and this is a news driven environment. Let’s see what Powell has to say today, let’s see what the jobs report looks like, let’s see what the CPI looks like, let’s see what the ECB does, let’s see what the FOMC does… You get the idea. The tiny bodied candles on the way down indicate tight intraday ranges. If the market opens inside of the previous range, expect light trading and low volume. If the market opens flat, we need volume. Eventually one side or the other will win and then we will have a direction to trade. That move might last, but it is more than likely to fail because we are not going anywhere. That means a nice little reversal will present itself. If the market opens flat and the volume is light, we might not move out of the first hour range. This is a time when you have to mentally prepare for dull intraday trading. We need stacked green or red candles on good volume and we need to be outside of the prior day’s range. If we have that, we can get more aggressive with our day trades. If not, keep your trade count low and your size small.
Support is at the 50-day MA and resistance is at the downward sloping trendline ($408).