The Market Fell Thru the 200-day MA With Ease – Short the Opening Rally
Posted by Pete Stolcers on November 13
Posted 9:30 AM ET – Seasonal strength typically keeps buyers engaged and sellers are hitting the bid while it is still there. The S&P 500 dropped below the 200-day moving average and stocks closed on the low of the day Monday. We are seeing a small relief rally this morning, but it won’t last. Gaps higher have been faded the last two months.
Treasury Secretary Mnuchin and Vice Premier Liu spoke by phone for the first time in months about a possible trade deal. They’re trying to clear a path for the G20 meeting between Trump and Xi. This news has sparked a small rally. After they meet Trump will highlight the great friendship they have and the potential for a deal… a great deal… perhaps the best deal ever…. or maybe not. There won’t be any specifics and a month later they will exchange punches again. There is a lot of bad blood and both sides are prepared for a long battle.
Mike Pence said that the trade imbalance with Japan has gone on too long. He wants to forge a bilateral trade agreement that will serve as a model for other countries.
Trump will be meeting with the trade team today to discuss a draft report on European auto tariffs. He is growing impatient with the EU and no progress has been made in the last two months. The UK and the EU are “almost within touching distance” of a Brexit deal. We have been hearing this for months.
Italy is steadfast in its budget and it will defy the EU. This could spark credit concerns.
Speaking of credit, the Bank of Japan is in uncharted territory. Its massive asset purchase program made it is the first nation to have a balance sheet larger than the country’s annual economic output. To put this into perspective, the Federal Reserve’s assets are about 20% of GDP and the ECB holdings are up 40% of the EU’s GDP. Japan has taken money printing to a new level.
Tomorrow China will release retail sales and industrial production. Traders will be watching for signs of weakness, but they might not surface yet. Businesses have been hoarding inventory ahead of probable tariffs. This inventory stockpile will accelerate the slowdown in 2019. China’s shadow banking industry ($16 trillion) has been teetering for years. The government placed restrictions on this practice and cash-strapped corporations have been pledging stock instead. China’s stock market has been drifting lower and brokerages are demanding more collateral. The Chinese government has urged brokerages not to sell shares of stock.
For years the market has been able to ride a razor thin credit edge. As long as everyone “played nice in the sandbox” the Ponzi scheme could continue. The first handful of sand has been thrown and there is plenty of blame to go around. We learned in 2008 that credit concerns can destroy the stock market. I’m not sure if trade deals can keep this from happening, but they better come quickly.
The market was just making a new all-time high two months ago and it’s hard to imagine that conditions could deteriorate so quickly when corporate profits are at record levels. In October of 2007 the market made a new all-time high and it looked like a year-end rally was underway. The rug got pulled out and stocks whimpered into year-end. That was a major warning sign and it is a lesson I have not forgotten.
When the market does not rally into year-end it is a bearish omen.
Swing traders should short the SPY on the open. We are only going to take a half position because I do not like shorting into year end. Use an intraday stop of $276.50. The rally this morning won’t last. Once we have some breathing room we will lower our stop.
Day traders should look for opportunities to short the market. We had a short bias yesterday in the chat room and we made a killing. The 200-day moving average fell with ease and that is a bearish sign.
A probable Fed rate hike, the Italian budget, the continuing resolution (December 8th), House investigations, ballooning debt in Japan, auto tariffs on Japanese/European cars, Brexit, tough Q4 comps…. take your pick. There are many dark clouds that could produce lightening.
If you don’t like to short the market, go to cash.
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