Market Needs Strong Data This Week – Watch Financials and SPY $235
A week ago the market sold off on worries that Trump would not be able to execute his game plan. The healthcare bill never even made it to vote and the GOP is fragmented. Investors are concerned and the S&P 500 dropped 20 points last Monday. Stocks gradually recovered last week and the SPY rallied back above support at $235. We will lean on that level and use it as our guide.
Trump won’t get any support from Democrats and he has an uphill battle before him. This won’t get any easier until he scores some points.
The focus will temporarily shift from politics to economic releases. ISM manufacturing, ISM services, ADP and the jobs report will drive the action this week. I am expecting good news on all fronts.
Global economic conditions are also improving. Official PMI’s from Asia and Europe were strong.
Earnings season will start in 10 days and stocks typically rally into the announcements. Banks have been weak relative to the market and we should see a bounce. They have plenty of upside and financials are the key to any market rally. Higher interest rates, strong consumer confidence, improving labor conditions and the potential for reduced regulation (Dodd/Frank repeal) are good for banks.
In general, Q4 earnings were good and CEOs were optimistic. That leads me to believe that we won’t see many pre-announcement warnings (outside of energy).
Interest rates are providing a bit of a headwind. The ECB and PBOC have hinted that QE is over so global yields are rising. This is fine as long as economic conditions continue to improve. As soon as they falter, the market will retreat.
From a policy standpoint I believe that healthcare reform could take years. The word “repeal” has negative connotations and change will not take place without support from Democrats. The focus should be on improvement and efficiency.
Now that tax reform is on the front burner and it should be much easier to find middle ground. This is really all the market cares about and I believe Trump will find low hanging fruit so that he can put points on the board. He better do it quickly or the market will grow impatient.
Watch oil and financials. As long as oil is stable energy stocks will not be a drag on the market. If financials catch a bid they will lift the entire market and they have plenty of upside. When we have both sectors working in our favor we have a chance for a sustained rally that day.
Swing traders should be long calls. Add to positions if the market closes above SPY $236.50. Stop positions out if the SPY closes below $235.
Day traders need to watch the first hour range. If the SPY is trapped inside of that range, trading conditions will be very challenging. If the market is above the first hour high, favor the long side. If the market is below the first hour low, favor the short side.
Trading should be relatively quiet the first few days this week and then major economic releases will heat up the action.
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