Is That the Extend of the Market Drop?

February 2, 2021

Posted 9:30 AM ET – Last week the S&P 500 had its worst performance since October. The upward sloping trend line and the 50-day moving average were breached after some of the tech giants reported earnings. Beginning of the month fund buying supported the market Monday and we closed back above those key support levels. The S&P 500 is up 30 points before the open and to tech giants will report after the close today. Buyers and sellers are paired off and this market volatility will continue.

Google and Amazon will report earnings and I am expecting solid numbers from both. All of the tech giants have reported good numbers, but the reaction has been negative. The S&P 500 is trading at a forward PE of 21.8 and that is well above the five-year average (17.6).

New Coronavirus cases are decreasing and the vaccines are being distributed. Investors don’t seem too concerned that the vaccines are taking longer than expected to deliver or that there are a number of new mutations. The focus is on an economic recovery in Q1.

Democrats control the White House and Congress. That makes a stimulus bill very likely. Treasury Secretary Janet Yellin wants to keep the printing presses running and she has stated that she favors a “go big or go home” stimulus bill. She also wants to test the appetite for fifty-year US bonds. Any stimulus that is approved will come on the heels of $900 billion that was approved in December. This is an incredible amount of money and the market is likely to get another “fix”.

This is a busy week for economic releases. ISM manufacturing came in at 58.7 (60.1 expected) and that is a very strong number. Tomorrow ADP and ISM services will be released. Friday the Unemployment Report will be released. Job losses have been on the rise and the four-week moving average for initial jobless claims is north of 900,000. All things considered, the economic numbers have been fairly strong.

China’s PMI’s were a touch light, but they were in expansion territory.

Eleven-year bull markets die hard and so do nine-month bull rallies. Sellers were not able to keep the pressure on and we saw an immediate bounce yesterday with follow-through this morning. It appears that the upward sloping trend line will hold and I view SPY $372 as a significant support level. Earnings season is front end loaded and the results won’t be as good as earnings season wears on. I still believe that the market will test last week’s low once more this month.

Swing traders are on the sidelines, but if the market rallies to the all-time high with ease it will be a sign that this was just a tiny dip to shake out bullish speculators. That type of price action would give me the confidence I need to get long. Let’s see how the action plays out after the tech giants report earnings.

Day traders should watch the early gap higher. We know there is selling pressure based on the price action last week. Yesterday’s bounce was strong, but this is a substantial gap higher this morning and I feel it will be tested right away. Wait to make sure that the bid is strong and don’t chase stocks. Once support has been established you can favor the long side now that we are back above major support. Any early market dip will give you an opportunity to identify stocks with relative strength. If by chance we make a new low for the day after two hours of trading (unlikely) favor the short side. I believe that intraday ranges will continue to be wide and there will be lots of great opportunities on both sides. I still prefer to trade from the long side.

Support is at SPY $372 and $377. Resistance is at $382 and the all-time high.
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