Now that technical support at SPY $167 has been breached, the market will probe for support. That was a key level since it represents the breakout to new highs in July. Traders that bought that breakout are now getting flushed out. We still have some work to do on the downside.
Before I discuss the positives, I want to review a few nagging issues that the market has to resolve. August/September is seasonally bearish. The Fed will taper this fall and the debt ceiling will be an issue when politicians return from recess. Earnings season is winding down and we are hearing from the weakest sector (retail). Sales taxes will go up in Japan in October. These issues will all be resolved when the” smart money” returns after Labor Day.
As we get into September, traders will be looking to buy this dip. They want to get long before the year-end rally starts. The Fed might taper, but monetary policy remains accommodative. Politicians will wait until the last minute, but the debt ceiling will get resolved (the can will get kicked down the road). Back to school retail sales are soft, but consumers are simply postponing purchases. Japan’s economy is just starting to come around and their government will postpone sales tax hikes. This might sound like I have my “rose-colored glasses on”, but I have history on my side.
This is nothing more than a normal round of profit taking. Bullish speculators are getting flushed out and the market will find support at SPY $163 (100-day moving average). I believe we will test it before Thursday and flash PMI’s will attract buyers. This is the only major news event between now and Labor Day.
China’s economic activity has been improving recently. Their last trade number showed that exports to Europe increased 3%. That is consistent with the PMI’s in Europe that were released for July. For the first time in many months activity has ticked into positive territory. The EU’s GDP was also better-than-expected.
Domestic economic activity has also been strong. Initial jobless claims (four-week moving average) have declined to their lowest levels since November 2007. Traders will embrace higher interest rates if they are accompanied by economic growth.
Corporations are producing record cash flows and productivity is running high. Any uptick in demand will go straight to the bottom line. Balance sheets are strong and companies are using their cash to buy back shares.
From a trading standpoint, you can trade from the short side. Keep your overnight positions to a minimum. All it will take is one dovish statement from a central bank to spark a huge overnight rally. I am looking for stocks that have been in a downtrend and are breaking horizontal support. I am keeping my size VERY small and I am day trading. To be honest, I am just biding my time.
The real trade will come off of and “air pocket” where we see a huge reversal off of an intraday low. That will signal that Asset Managers are ready to buy the dip. When you see that, start taking bullish positions. If you want to know what it looks like, reference the SPY on June 24th.
We are in a news vacuum until Labor Day. Option buyers will be fighting time decay the whole way. That is why I prefer to keep my size small and to focus on day trading stocks.
Look for continued weakness and a test of the 100-day moving average this week. Flash PMI’s should attract buyers and that could be a nice level to start scaling into bullish positions. The price action the next two weeks will be very choppy and very light. Keep your size small.