For more than a week I have been pointing to this moment and mentioned it could present a problem. The market got ahead of itself and it was due for a pullback. Traders do not want to be reminded that the punch bowl will eventually be removed.
Yesterday Chairman Bernanke started his speech and the first comments were dovish. That changed when he answered questions. He said that if economic conditions improve, the Fed will taper bond purchases.
Here are the important takeaways. The Fed will not stop quantitative easing, they will simply reduce purchases. Secondly, they will only do so if economic conditions are improving. Thirdly, they still plan to carry a large balance sheet well into the future. The news was not bearish.
Overnight, China’s flash PMI came in below 50. That was worse than expected and it indicates economic contraction. Government officials are satisfied with the current growth rate (7.7%) and that has some traders on edge. Asian markets tumbled on the news.
The flash PMIs out of Europe were better than feared and analysts are looking for a bottom. EU officials forming a centralized banking authority and credit concerns will remain low. The last two summers we have been plagued by Euro credit concerns – not this year.
Initial jobless claims fell 23,000 and that was the adjustment we were looking for after last week’s spike. Durable goods orders will not have much of an impact tomorrow. The only other economic release is GDP next week.
Earnings season is over and the news is light. Trading volumes will fall off during holiday trading and the action will be dull.
As I have mentioned during the last week, I have been day trading. I was able to catch the rally yesterday and the selloff. I also mentioned that I would not be taking overnight positions unless we get a pullback. The scenario I was looking for played out and I might take action if I like what I see.
The market was getting frothy and bullish speculators needed to be flushed out. Because we ran so high, another wave of selling might be required. Asset Managers are waiting in the wings and this will be a buying opportunity.
We probed for support early in the morning and we bounced. The next wave of selling will be very telling. If the market gradually drifts lower and we make a new low for the day, expect more selling. If we go down and test the lows briefly and the market bounces, I will buy some calls. I am not going overboard and I will keep my size small.
I do not want to be exposed to time decay and we might have more work to do on the downside. If the market rebounds and finishes close to unchanged, I will buy more calls.
First support is at SPY $163.50. That is the 20-Day MA and it seems like a reasonable resting spot. Major support lies at SPY $159 and I doubt we will get anywhere near that.
I like stocks that have are in an uptrend, consolidated and broke out (particularly if they held up well in the last 24 hours). They will retest the breakout. If it holds, they will run when the market recovers. BMY back to $42.50 is a good example of the pattern we are looking for. Don’t focus on BMY, focus on the pattern.
If you took my advice and stayed on the sidelines, you should be licking your chops right now. This will be a great buying opportunity. Be ready.