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Yesterday the market started the year off on a weak note. Stocks pulled back throughout the day and they closed near their lows of the session. This dip still needs to run its course, but it will set up a nice buying opportunity.
I mentioned on Monday that I was taking profits on all of my bullish positions. I did not see any signs of selling, but the last stage of this rally felt fabricated. Asset Managers were goosing stocks to get favorable year-end marks for their portfolios.
The volume was extremely light and I knew that a small round of profit taking could force bullish speculators out of their positions. This is exactly what happened. My decision simply came down to risk management (as opposed to seeing signs of selling).
The market is trying to rally on the open, but those gains are not likely to hold. A day’s worth of selling won’t flush bullish speculators out. We will probe for support and we have more work to do on the downside. I believe SPY $181.50 will be tested in the next few days. That was the breakout and it should hold.
Earnings season kicks off next week and the economic calendar is heavy. Stocks should find their footing and the volume will return. I will be watching for an intraday low that reverses quickly and is not tested the rest of the day. That will indicate that buyers have returned.
The macro backdrop remains bullish. Global economic growth is moderate, credit concerns are low and central banks are printing money. Politicians passed a budget and traders will assume that debt ceiling negotiations will go smoothly in February. The Fed started tapering and they will maintain their zero rate interest policy.
Corporate profits will be good and balance sheets will be stronger than ever. Companies will continue to buy back shares at a record pace.
If your trading horizon is 1 to 2 months, stick with your positions. This storm will pass in a few days. Your entry price should be excellent since we bought after the FOMC statement.
If you are a shorter term trader, take profits and wait for better entry point.
The winter storm in the Northeast and the holiday shortened week will keep traders off of the floor. Trading volumes will be low and we could hit an air pocket today. If we make a new low after the first couple of hours of trading, we will drift lower the rest of the day.
Day traders can get short if SPY $182.50 is breached. I would not hold overnight bearish positions. This market wants to rally.