Heed These Warning Signs – Short the SPY Today If This Happens
Posted by Pete Stolcers on March 5
Yesterday the market tried to breakthrough horizontal resistance at SPY $281. The catalyst of the day was favorable trade news from the US/China negotiations. An apparent deal sparked optimism, but stiff resistance repelled stocks for the second time in a week. The selling pressure was very heavy and the headwinds are blowing.
I outlined the new trade details in yesterday’s comments. If the Wall Street Journal article is accurate, this will be a good trade deal. Unfortunately, this was recycled news and the expectations were already high. A trade deal with China is fully priced into the market and it will not provide upside impetus.
Similarly, a dovish Fed is expected and comments from officials no longer pack any punch. Analysts are expecting the balance sheet roll-off to end in 2019. Most Fed officials still expect to hike at least once this year and the market is not pricing in any rate hikes. The market rebound will embolden the Fed and I believe any surprise favors the downside.
England has 23 days to reach a Brexit agreement. England needs guarantees from the EU on a backstop plan that eliminates border checks in Ireland an a team will try to secure that as they head to Brussels. If they are successful, Theresa May has a chance of getting an agreement through Parliament next week. The EU has been steadfast in negotiations and this will be a challenge.
Global economic conditions are soft in the world’s largest economies (Europe, Japan and China). China’s Premier (Li Keqianq) lowered the country’s economic growth target by .5% compared to 2018. This is the slowest pace since 1990 and he used the phrases “tough struggle” and “grave and more complicated environment” in his statement. A trade deal with the US will not slow this trend. The PBOC has eased 5 times and China’s economy continues to drift lower.
Domestic economic conditions are also showing signs of strain. Q4 GDP was better than expected, but it is backwards looking. Chicago PMI was also better-than-expected. The rest of the numbers (retail sales, durable goods orders, ISM manufacturing and construction spending) missed expectations. This morning we will get ISM services and that will be an important number. As long as global weakness does not spread to the US, investors seem satisfied with current market levels. Additional signs of strain will spark profit-taking.
Earnings season has ended and the results were fantastic. Stocks are trading at the upper end of their valuation range (forward P/E of 16).
Swing traders should prepare to short. The downside risks far outweigh the upside rewards. Short the SPY if trades below $278. We are only going to take a half position. Use a close above SPY $281 as your stop. We will add the second half when the 200-day moving average is breached. Yesterday’s price action tells me that resistance is stiff and that sellers are getting more aggressive. The VIX popped and that is also a warning sign.
Day traders should watch support at $278 and resistance at $281. The market covered that range yesterday and we are likely to stay in it today. Resistance is stiff and I doubt we will penetrate it. It is possible for downside support to fail. If it does you can aggressively short and you can hold some overnight puts. If the SPY is between $278-$280, fade the extremes. In this scenario we will chop back and forth. We need to breakout to get intraday volatility back. Until then, trim your size and your trade count.
ADP and the jobs report will give us an indication of job growth later in the week. The upside catalysts have run their course and each economic release carries a downside surprise component. Watch the reaction to ISM services 30 minutes after the open.
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