The S&P 500 is only 40 points away from an all-time high. Given the bottom-line devastation from the Coronavirus, this is an incredible rally. Q2 profits for S&P 500 stocks were down 33% on average. Investors are relying on a “V” bottom recovery and additional government stimulus. We are heading into a news vacuum the next three weeks and I believe the upside rewards are smaller than the downside risks.

Earnings season is winding down and 90% of the S&P 500 companies have reported. On average, revenues are down 11% and profits are down 33%. The rally has been narrowly based, but we are seeing rotation into the laggards. Investors are expecting a solid recovery in Q3 and I believe that there is room for disappointment.

The Coronavirus continues to spread and there have been more than 5 million cases in the US. Some of the largest states are still in Phase 3 and the fall semester for many schools is in limbo.

Republicans and Democrats have not been able to reach an agreement on the next stimulus bill. President Trump used his executive power to extend unemployment benefits. His actions are on the low end of what both parties wanted and Congress is going to challenge his authority to do this.

Relations with China are deteriorating. Consulates have been closed in both countries and leaders have been sanctioned. Favorable trade status in Hong Kong has been removed and restrictions/regulations are being imposed on tech companies. A year ago this would have sparked selling, but investors are numb to the news.

The jobs number last week was in line, but job increases fell from 4.8 million to 1.8 million month over month. Initial jobless claims have been increasing at an average pace of more than 1 million during the last four weeks. This is a number that I will be watching closely the next few weeks. ISM services and ISM manufacturing were strong last week.

Earnings season is winding down and there are not any major economic releases the next few weeks. Congress will be in recess and the mudslinging will subside for a few weeks. This is typically one of the slowest periods of the year and trading will grind to a halt. A quiet news cycle favors the current trend and traders will try to latch onto any piece of news.

Swing traders who can’t watch the market intraday should be in cash. We are not going to try and squeeze the last drop out of this rally and I view this as a low probability trading environment. Good news is priced in and there are many dark clouds on the horizon. August is seasonally weak and I feel that we will have a better entry point in the next few weeks. This is a powerful market rally and shorting will be risky. During that market decline we can gauge the selling pressure and we can determine the magnitude and the duration of the drop. Our best play is to wait for a market dip and to reload on bullish put spreads.

Day traders to try to make money early in the day. A flat open on a Monday suggests that a quiet day lies ahead. Expect tight intraday ranges and low-volume the next few weeks. We will use the 1OP indicator to enter and exit traits and Option Stalker searches will help us find the best stocks. I will be trading 1/2 of my normal size in the morning and 1/4 of my normal size in the afternoon. Reduce your size and your trade count.

Welcome to the “dog days” of summer.