Yesterday, the market reacted to the FOMC statements. Many analysts expected a softer tone after the market decline in Japan. Good news was priced in and as I forecasted, this was a sell the news event.
Overnight, flash PMI’s were also released. I have been warning you that the results in China would be soft. They missed by a wide margin and activity has fallen to its lowest level since October 2012.
This is exactly why I have been focusing on the short side. I bought puts yesterday when Ben Bernanke started to speak. I added to the position when it was apparent we would close below SPY $164. I outlined my game plan yesterday and if you followed it, you’re making a boatload of money this morning.
The FOMC rhetoric did not change much and there was good news in their statement. They feel the economy has been able to shoulder fiscal spending cuts and they see improvement on the horizon. The market will embrace higher interest rates if the move is related to economic growth. That is the rub.
Interest rates are climbing today and we don’t see any growth. Asset Managers know that the timeline has been moved up and they won’t wait to adjust. They are selling bonds now.
This phase will take a couple of months to play out. As I’ve been mentioning the last few weeks, the focus will shift to economic releases. This morning, initial jobless claims came in at 354,000. That was about 14K more than estimates.
Europe’s flash PMI was better than expected, but it is still weak. Most analysts have been calling for a bottom in Europe. If we see improvement in the next two months global markets will find their footing. Unfortunately, conditions in China continue to slip. Their government does not plan to stimulate. Domestic activity should improve in a couple of months when the sequester runs its course.
This decline still has some work to do on the downside. I believe we will test SPY $159 in the next few days. That will set a hard bottom and we will trade in a range the rest of the summer ($159 – $168). Strong support + strong resistance = trading range. This means you have to be in hit-and-run mode.
Don’t expect sustained directional moves. At best, you will get 2 to 3 days of decent price action. Set targets and take profits.
I will be selling my puts when we hit a selling climax today. I have nice profits and I don’t want to see them slip away. Asset Managers will nibble and we will get a bounce. When that bounce stalls I will reload (buy puts).
Asset Managers are seeing a decent amount of profit taking and they will bid passively. They want to see bona fide support. That is why I believe we will see another wave of selling. Once that runs its course, a nice buying opportunity will set up.
This is a strong eight-month rally and there is no reason to believe it will end abruptly. Credit risks are not an issue and interest rates are still near historic lows. Corporate cash flows and balance sheets are strong. The market will eventually embrace higher interest rates.
You have huge profits in your put positions. Protect them. There will probably be another shorting opportunity. Once that hard bottom is established, there will be a buying opportunity.
Hit and run.