Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS FRIDAY – Wednesday the S&P 500 dropped 100 points and we saw a swift round of profit-taking. Yesterday the market tried to bounce, but it was not able to close above the mid-point of Wednesday’s range and I view that as technically bearish. Overnight the S&P 500 was down 60 points and tested the upward sloping trend line that started in November. Since then, the S&P 500 has recovered most of those losses and it is only down 10 points before the open.
The cross-currents are strong. Dovish monetary policies by the Fed will keep interest rates low through 2022. Democrats control Congress and the White House and they are going to push through a stimulus bill with or without Republicans. $1.9 trillion is an incredible amount of money especially when you consider the $900 billion that was already approved in December.
Earnings season is ramping up and tech giants have not been able to excite investors. Microsoft, Apple, Facebook and Tesla have reported and in aggregate the reaction has been negative. Google and Amazon will report next week. Tech companies to a large degree have benefited from Coronavirus. Their products have been in demand and their employees can work remotely. I believe that once the tech giants report earnings, profit-taking will be more aggressive. The S&P 500 is trading at a P/E of 40 and that is stratospheric by historical measures.
Bullish sentiment is extremely high and you can see that in the frenzy over short squeezes (GME). Margin lending is at record highs and retail investors are “all in”. Option implied volatilities are very low indicating complacency (no fear).
Swing traders should be almost entirely in cash at this juncture. I tried to get cute with some bullish put spreads that expire today and I’m trying to break even on those trades. We also have two bullish put spreads that expire in a week and we have hedged those positions by buying VXX calls. Once we are in a cash position we will sit on the sidelines and wait patiently for clarity. If the market breaks below SPY $372 we are likely to see it test the 100-day moving average. If I sound like I’m bearish, I’m not. This market could explode in either direction. A $1.9 trillion stimulus bill could certainly result in a market melt-up through the upper end of the channel. This is a great environment for day trading, but swing traders need to wait for conditions to settle down. Tomorrow I will be releasing a very educational video on YouTube that outlines our spreads that were in trouble and how we adjusted our risk. This is a must watch if you are a swing trader who sells credit spreads.
Day traders should watch for early weakness. Make sure the bounce off of the overnight low is secure. I believe we will see two-sided trading in a fairly wide range today. We will use the 1OP indicator and Option Stalker searches as our guide.
Support is at SPY $372 and $376. Resistance is at $381 and the all-time high.