Earnings guidance and next week’s FOMC will be critically important
PRE-OPEN MARKET COMMENTS THURSDAY – The price action during the last week has been good and the market has been able to fend off hot inflation numbers. Trading volume is light and the conviction level is low. In the next week the news floodgates will open. Major earnings releases will include the tech giants and the FOMC is expected to hike rates by 75 basis points. These headlines will fuel the market in August.
This morning the ECB raised rates by 50 basis points and a 25 basis point hike was expected. The S&P 500 rallied on the news. This is the first rate hike in over a decade and many analysts feel that they are behind the curve.
Russia has restored gas supplies to the Nord Stream 1 pipeline after scheduled maintenance. Putin had threatened to keep it shut down and this would have created power disruption in Europe and energy prices would have spiked. In the grand scheme of things, this was a temporary, but threatening storm cloud.
I like the fact that the S&P 500 has been able to form a base that has lasted longer than the previous pause in May. The drop from the prior low of the year was marginal. That is a sign that buyers were more aggressive than they have been. The volume has been light and I would not characterize the price action as strong. There have been a number of bid checks and buyers have continued to express interest. There have also been a few minor resistance levels (horizontal and the 50-day MA) that have been breached to the upside. We are close to resistance formed by a downward sloping trendline from March 29th and that comes into play around SPY $400.
There are still plenty of dark clouds that will keep the market from lifting off. We have not felt the impact of the rate hikes and that will take months to bear out. A mild recession is priced into the market. Politicians and Fed officials will flee the capital in August and that is typically a nervous month for the market. The economic releases during August will be important and any sign of weakness will not be received well. Initial jobless claims have been ticking higher the last month, but they are at low levels.
My biggest concern is China. Decades of hyper growth lead to froth. Real estate developers are defaulting, people are not paying mortgages on new construction and depositors in rural areas are not able to withdraw funds from banks. Foreign funds are selling Chinese bonds and this is the fifth straight month in a row (longest streak in decades). China is the second largest economy in the world and it has been the global growth engine. A credit crisis there will impact all of us.
Given the technical and fundamental backdrop, I still feel that cash is the best place to be for longer term swing trades. Corporate guidance during earnings season and economic data points in August will provide us with valuable information.
From a day trading standpoint I am seeing better opportunities on the long side. Stocks that have been badly beaten down (i.e. crypto) have had nice sustained rallies during the day. Evaluate the price action during the first 30-45 minutes and find those pockets of strength (stock groups). When the market finds support and you have a bullish 1OP cycle, favor the long side and ride these stocks. Set passive targets and know that the low volume back drop is unlikely to produce sustained market rallies.
The S&P 500 has been volatile this morning after the ECB rate hike. Let the dust settle this morning. We could see some big swings early.
Support is at SPY $386 and $391. Resistance is at $396 and $400.