The threat of a major market drop this morning is minimal ahead of major news. I like the long side today, but we need an early breakout if we are going to add.
PRE-OPEN MARKET COMMENTS TUESDAY – The market gains from last week have been able to hold and profit taking has not gained traction. The FOMC statement will be released tomorrow and MSFT and GOOG will report earnings after the close today. If the SPY is able to rally above $455 in the first hour of trading today, there is a chance that we will see a gradual float higher. Excitement over AI will attract buyers. Sellers will be relatively passive ahead of major news and they will not risk fading the trend. There is sentiment that the Fed might soften their tone thereby reducing expectations for a September rate hike as they head into recess. That would be bullish. As far as a breakout today, it has to come in the first hour or the market will fall into a tight trading range.
The Fed is going to hike rates by 25 basis points. They can justify the move because core inflation is still high. Recent economic data points have been good, the bank stress tests show that balance sheets can withstand a recession and the market is at a 52-week high. This gives the Fed plenty of breathing room and most Fed officials believe that there will be one more rate hike this year after the one tomorrow. I don’t view the initial reaction as being bearish because the market is expecting the rate hike.
August and September are historically weak months for the market. Once mega cap tech stocks report, some of the excitement will wane. The market will get nervous when the Fed is in recess. This is just a normal seasonal pattern. We saw a rally on Q2 earnings in July and then a decline (Aug-Sept) in 2020, 2021 and 2022. After the jobs report on August 4th things will really quiet down. Traders and investors take vacations before the kids go back to school. We still have a 2-3 more weeks before the action dies down.
The big overnight news is that China is going to support the real estate market and that they are going to bolster consumer demand through fiscal/monetary policy. The Hang Seng was up 4% on the news and it will provide a springboard for our market.
I am expecting one more push higher in the next two weeks. As the market pushes higher and stalls, we will take gains on longs. I won’t know if this leg higher will result in a buying climax until I see the price action. A swift round of selling off of a new relative high would be a warning sign, but we are not going to guess that it is going to happen. This rally can be characterized as “three steps forward and two steps backwards”. Buy dips on support and take gains when the next leg higher loses its momentum. This is the mindset you need to be in. Until one of the pullbacks has some “teeth”, we operate under the notion that dips will find support and that they represent buying opportunities. We are aware of seasonal weakness and that is why we take gains into strength when the momentum stalls.
The chances of trading in a light volume range are better than the chances of breakout out through $455 early in the day. If that move is going to take place, we will see stacked green candles early and a test of that resistance in the first hour. Overseas markets did not have much of a reaction to the news from China. The rest of Asia was flat and so was Europe. I do like the backdrop for longs. If you have stocks that have nice D1 breakouts on heavy volume, you can take starter positions early in the day. Don’t add unless we get that early breakout through $455. I feel that the downside should be contained this morning. If we were going to see heavy selling after the rally last week, it would have happened by now. Instead, support has formed and the gains have held. If we do not get that early breakout, expect a dull trading session and error on the side of caution.
Support is at SPY $452.00 and resistance is at $455.