The market rally feels nice, but we are likely to see profit taking
PRE-OPEN MARKET COMMENTS MONDAY – The market has recovered more than half of its loss for the year and the price action the last few weeks has been encouraging. The duration and magnitude of the bounce has been excellent and the market has been able to move through major resistance levels. The move has come on very light volume and that is a sign that the buying conviction is not where we would like to see it and that we should expect dips. The good news is that this rally does solidify support at the low of the year and that price is likely to hold.
The 2% interest rate hike since May will not cycle through the economy for at least a couple of months. This is the most progressive tightening since the 1990’s and Wednesday the FOMC minutes will be released. In the grand scheme of things, $10 trillion in stimulus should provide a gigantic safety net for the economy and by historical measures, interest rates are still low. All of that money has to go somewhere and with bond yields well below the inflation rate (negative real returns), stocks are attractive on a relative basis.
Retailers will post results this week. Morgan Stanley believes that the results will be poor. More than half of the retailers they track have lowered guidance and they believe that is the tip of the iceberg. They believe that the low end (WMT, DLTR) will perform better than the rest. Retail sales numbers for July will also be released this week.
China July Industrial Production rose 3.8% y/y (vs. 4.6% expected) and slightly lower than the 3.9% figure reported in June. Retail sales increased 2.7% in July compared with the same period in 2021, below the 5% forecast. In addition, China’s jobless rate for 16-to-24-year-olds hit 19.9%, the highest ever recorded. And new house prices were down 0.9% y/y (vs. down 0.5% prior). The PBOC cut its one-year lending rate by 10 basis points. I still believe that a credit crisis in China is the greatest market threat. There are many warning signs and it is the second largest economy in the world.
The economic releases are fairly light this week and earnings season has climaxed. This is typically a very dull part of the year.
In the last two weeks I have suggested that swing traders focus on selling OTM bullish put spreads. Those trades should be in great shape. I would NOT enter more of them at this level. The market bounce has come on light volume and a pullback is likely as we approach the 200-day MA. Wait for the market to probe for support. That will provide you with an opportunity to reload. I like this strategy for longer term swing trades because it provides us with plenty of cushion and we can take advantage of time decay.
Day traders need to be patient on the open. We will start off with a 1OP spike M5 and we should see if the bearish cycle produces anything. During the first 45 minutes look for strong stocks and wait for market support. The market is trending higher and we will not see a sustained market drop until the upside is tested (buyers still have the ball). I am favoring the long side and the first bounce this morning will be very telling. If we run through the high of the day with stacked green candles, we will recover much of the overnight gap. If the rally is tenuous and we are not able to get through the hod early, we need to watch for signs of resistance. That would be a sign of profit taking. I believe the most likely scenario is a drift lower on the open, a bounce that barely gets through the hod and then a dull day of trading inside of the first hour range the rest of the day on light volume. That means I am in defensive mode. Error on the side of caution and keep your trade count down. There was not much news over the weekend, we are in the middle of August, the volume has been light and it is Monday.
Support is at $417.50 and $421. Resistance is at $427 and $432.