Stay In Cash – Market Bounce Coming But We Need To Be Sure
POSTED BY PETE STOLCERS ON APRIL 3
We have seen heavy selling for the first time in years. Yesterday the S&P 500 barely had an uptick for the first five hours trading. The futures were down 80 points and the 200-day moving average was breached with ease. Asset Managers are not going to be aggressive buyers with that type of price action. In fact, they are in “risk off” mode and they are selling. Don’t trust this early bounce.
Earnings season is approaching and profits should calm nerves. The results will be excellent. This is the only thing keeping a bid to the market right now. Typically stocks move higher into earnings season and that move is fueled by mega cap tech. These stocks have been relatively weak and they are surrounded with negative news.
China countered Trump’s tariffs with new tariffs of their own. Agricultural products were the primary target and both sides are flexing their muscles. If they plan to determine who has the upper hand, the market will tank.
Interest rates are also a concern for some investors. The Fed has been dovish for the remainder of 2018, but they have hinted a more aggressive stance in 2019. The market is historically weak during the first phases of tightening. Strong economic releases and moderate inflation will calm nerves.
ISM manufacturing was strong yesterday. ADP should be excellent tomorrow. Initial jobless claims have been falling for the last four weeks. The jobs report on Friday will also be strong and wage inflation will be watched closely. An increase of .1% would be market friendly.
Swing traders should be in cash. The market easily breached a major moving average and we don’t need to rush in. I want to see a close above the 200-day moving average and I want it to hold for at least a day before we buy. This earnings bounce might only last a few weeks. If trade negotiations with China don’t improve we can expect another wave of selling. This earnings bounce might provide a shorting opportunity.
I would not suggest getting short now. Option implied volatilities are sky-high and buying options is a losing proposition. The trade battle is just beginning and there is a chance that China or the US will back down. If that happens you will see a massive overnight rally and shorts will be crushed. We need to let this play out.
Day traders should look for an opportunity to short the opening rally. Buyers will be passive until they see a selling climax. That drop must happen intraday and a sharp reversal will rally the market to the high of the day. Until we see that we can assume that every opening bounce will be faded. I am much more interested in trading the long side once we get that capitulation. The market is over-extended on the downside and we are likely to see a bounce soon.
Tread cautiously. Wait for the capitulation and let the market close above the 200-day moving average for at least two days before you buy.
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