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Yesterday, the market pushed higher on light volume. Earnings have been decent and the market wants to run. Unfortunately, the macro backdrop is deteriorating.
Flash PMI’s came in weaker than expected and I believe this bounce will soon hit resistance. China’s flash PMI fell to 50.5 from 51.6 in March. That was much worse than expected. Europe’s flash PMI was flat, but the manufacturing sector was particularly weak. The new orders index fell to its lowest level since December. Last week, we learned that new car sales fell to their lowest level in 10 years.
While the rest of Europe has struggled, Germany has remained strong. That is no longer the case and we are seeing weakness in the EU’s biggest economy. This will be the second consecutive quarter of negative growth for the EU. GE/IBM painted a very dismal picture for the EU in 2013.
Domestic economic conditions are slipping as well. Traders are willing to give the market a “free pass” until the next jobs report because we saw a similar dip in April 2012. I have enough evidence to suggest that conditions are continuing to slip. Empire Manufacturing, new home sales, initial claims, the Beige Book and the Philly Fed all point to slower activity. Fiscal spending cuts are about to kick in and that will weigh on the market in May.
Earnings have been decent (65% beat) and the market is pushing higher because stocks are attractive relative to other investments. However, the macro backdrop is slipping and demand will weaken.
The rally we are seeing today could be the last surge higher. If I see a reversal today I will buy puts. If not, I will keep my powder dry and I will focus on day trading. Given the recent economic releases, I believe the next big is down.
The market has been in a strong uptrend for many months and that trend is not easy to reverse. We have already seen cracks in the dam and it could take couple of days or a couple of weeks.
Asset Managers will not aggressively buy stocks near an all-time high when economic conditions are deteriorating. Some will take profits after a big run. When sellers go to hit bids, they will find that there is not as much size (demand) as there was a few weeks ago.
Calling market tops is a losing proposition. We saw a decline last week and follow through. Now I want to see a bearish reversal with follow through selling. That will be enough to get me to buy some puts. I will add to the position if I see follow-through selling the next day. Next, I will add if SPY $153 fails.
I have been bullish since November and it is always tough to shift gears. I know I am early with this forecast, but when conditions change, they will deteriorate rapidly.
If we continue to push higher, day trade the upside and maintain tight stops. If we reverse, be prepared to go short.
If you are a Swing Trader and you have bullish positions – congratulations. I have not joined you in this rally. Take profits and make sure to have stops in place.
Watch for a bearish reversal or late day selling each day. That will be a very important warning sign.
The S&P 500 is up 16 points as of this writing and I feel foolish writing these comments.
DO NOT FADE THIS MOVE UNTIL YOU SEE THE SIGNS.
Being on the wrong side of a move for a week or two could wipe you out. When we do finally roll over, you will be out of money.