Daily Commentary: July 02, 2020

Jeremy Engelbrecht1Option Commentary

I Am Short Term Bullish But My Bias Will Shift To Bearish In August [Here’s Why]

Posted by Pete Stolcers on July 02

This week the S&P 500 bounced off of the 200-day moving average and it closed above the downward sloping trend line yesterday. Buyers are engaged ahead of earnings season and the economic numbers have been good. The market should have a positive bias for the next month and selling out of the money bullish put spreads is the best strategy.

Wednesday ADP reported that payrolls in the private sector rose 2.37 million during the month of June and that was in line with expectations. The big news came when May’s loss of 2.76 million jobs was revised to a gain of 3.06 million jobs. It’s unusual for ADP to have such revisions, but that change is consistent with last month’s Bureau of Labor Statistics number. The new increase in Coronavirus cases and the related shutdowns are not reflected in this number.

This morning we learned that nonfarm payrolls increased by 4.8 million and that was better than the 3.23 million that was expected. The market liked the news and the PPP stimulus is working as states reopen. Yesterday ISM Manufacturing rose to 52.6 and that was much better than the 49.2 that was expected.

Arizona, California, Florida and Texas are reversing the reopening’s and these four states represent 30.3% of the US GDP. Other states have halted the reopening and in aggregate they represent 40% of the US economy. The recovery is going to take much longer than expected and credit concerns are surfacing as loan defaults hit 2009 levels. To date, the government has paid out $350 billion in benefits and the paycheck protection program (PPP) was extended until August 8 and it was set to expire Wednesday. This will add another $600 per week in unemployment benefits and it will take this total up to $660 billion. There will be $130 billion left in the Phase 3 bill.

According to the Brookings Institute, 700 cities in the US have halted plans to spend on infrastructure and IT. State financed spending will be slashed and Moody’s believes that 4 million municipal job cuts over the next two years are likely.

China’s recovery is not where we would like to see it. Consumers have to resume their previous lifestyles and they have to spend money. The Dragon Boat Festival showed that year-over-year attendance was down 49% and that spending was down 69%. China has a two month lead and this suggests that the global recovery could be very sluggish.

Earnings season is a couple of weeks away and the market bid is typically strong heading into the numbers.

Swing traders need to tread cautiously. My short-term view for the next few weeks is bullish and we will continue to sell out of the money bullish put spreads on strong stocks. Last night I posted my Weekly Swing Trading Video and I highlighted four new bullish put spreads. It will be hard for us to get filled on these spreads and we are not going to chase. I was looking for solid companies where the price movement is not over-extended and where the stocks are above major technical support. These bullish put spreads will expire in two weeks or less and I want to take advantage of accelerated time premium decay. This strategy also allows me to constantly evaluate market conditions. As we get further into August, my market bias turns decidedly more bearish. The economic recovery has been largely subsidized by government spending and this “sugar high” won’t last if the virus continues to haunt us. The economy is treading on thin ice and I consider this to be a low probability trading environment. We still have time to generate income on our bullish put spreads, but we need to be mindful of the backdrop. The market gains have been heavily concentrated in a handful of tech giants and this is not a healthy sign. For those of you who are tempted to buy puts – good luck. You are going to take a lot of heat on your positions. We are not going to short until we have technical confirmation and I believe that window is still six or more weeks away.

Day traders should wait for support to be established this morning. Once the bid has been tested I believe the market will grind higher. The news was excellent and a light volume rally is likely into the holiday weekend. Look for stocks with relative strength and set passive targets. After the first two hours of trading I’m expecting the volume to wane. I will be trading half size in the morning and I might not trade the afternoon session.

Support is at SPY $307.50 and 310. Resistance is at $315.

Celebrate the birth of our great nation and raise your flags. Happy Fourth of July!

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