This is going to take time to play out. We don’t know the full effects of the rate hikes to this point or if more are coming.
PRE-OPEN MARKET COMMENTS MONDAY – Credit concerns are elevated and all eyes are on the FOMC Wednesday. A 25 basis point rate hike is expected and traders will be watching for a more dovish tone. This is the fastest tightening we’ve seen in decades and the wheels are starting to wobble. The SPY will open within striking distance of the major moving averages and we are likely to stay close to them into the Fed announcement.
Credit Suisse was purchased by UBS. This was big news and it will settle nerves, but there are a few things to keep in mind. CS has been in trouble for years and you can see that in a long term chart. They never recovered from the financial crisis in 2008. Secondly, Switzerland is not in the EU and it is not a member of the ECB. It has its own central bank and that means it can act swiftly and decisively. The same is not true of the ECB which is very fragmented. We don’t know if a credit crisis is looming, but it’s prudent to keep an eye on banks in Greece, Portugal, Italy and Spain. Their ratio of assets to non-performing loans is low by comparison (risky). The ECB raised rates by 50 basis points last week.
I believe that Asset Managers are going to be cautious for a few months. They want to see if other banks are in trouble. The effects of previous rate hikes are still filtering through the economy and tighter credit conditions are going to impact consumption. Prior to SIVB and CS, Asset Managers were willing to nibble at major support. Stock valuations are still “rich” at a forward P/E of 18 so there is no hurry to buy.
The market is likely to compress as interest rate hikes cycle through the economy and as banks “circle the wagons”. Stock valuations will improve with time as earnings stabilize and the comps from a year ago become easier to beat. If the Fed is dovish, the market is likely to compress above the major averages and investors will take comfort knowing that monetary tightening is going to end soon. If the Fed remains hawkish, the market will compress below the moving averages. Fear that they’ve gone too far will weigh on the market. Asset Managers will be cautious and the bid will weaken.
Swing trading is extremely difficult and the SIVB bank failure changed the back drop instantly. If the “second shoe” is going to drop, it will happen in the next few months. I do not suggest having any swing trading positions on ahead of the FOMC.
Day traders need to be patient. The market is going to open flat. We had a nice rally Thursday and we gave most of it back Friday. We are going to compress inside of the low from Thursday ($384) and the high from Thursday ($396). I don’t believe the market is going to help or hinder the next few days. Financials and basic materials stocks have been weak and semi-conductor stocks have been hot. Lean on sector strength/weakness the next few days. Find a few good movers each day and pick your spots. Volume for the SPY is always important. If we have good volume, we should see two-sided action with some follow through once the momentum is set. If we have low volume, the moves will be choppy and small. The same goes for stocks. Look for that heavy volume and stacked candles. Big D1 breakouts are important on heavy volume. Be very selective with your stock picks.
Support is at $384 and resistance is at $396.