© Copyright 2022 eOption, a division of Regal Securities, Inc., Member FINRA
| Important Disclosures
950 Milwaukee Ave., Ste. 102 | Glenview, IL 60025
The information on this web site is for discussion and information purposes only. All accounts accepted at the discretion of eOption which accepts customer orders only on an unsolicited basis, and does not make any recommendations regarding any security or securities product with the possible exception of orders executed by our full service bond desk. Nothing contained herein should be considered as an offer to buy or sell any security or securities product. Online trading has inherent risks due to loss of online services or delays from system performance, risk parameters, market conditions, and erroneous or unavailable market data.
FINRA BrokerCheck reports for Regal Securities and its investment professionals are available at www.finra.org/brokercheck.
Options Disclosure: Options involve risk and are not suitable for all investors. Prior to trading options, you must be approved for options trading and read the Characteristics and Risks of Standardized Options. A copy may also be requested via email at email@example.com or via mail to eOption, 950 Milwaukee Ave., Ste. 102, Glenview, IL 60025. Online trading has inherent risks due to loss of online services or delays from system performance, risk parameters, market conditions, and erroneous or unavailable market data.
eOption Commissions: Broker-assisted orders are an additional $6. Option strategies involve multiple purchases; therefore your transaction costs may be significant for option strategy trades. A commission rate of $2.00 for equities and $3.99 + $.10/contract for options, per execution, applies to orders entered and filled by eOption's Auto Trade Desk and does not apply to customers who enter their trades directly into the eOption platform and are not utilizing the Auto Trade desk.
Broker Comparison: The competitor rates from published websites were verified on 3/1/2022 and are believed to be accurate, but not guaranteed. Commissions are subject to change without notice. At some firms, commissions may not reflect broker-assisted fees, orders over 1,000 shares, penny stock trades, OTCBB, pink sheet stocks or foreign stock orders. Firms may offer reduced commissions if additional criteria are met.
Blog & Commentary: eOption is neither affiliated with, sponsored by, nor endorses commentary and the opinions expressed are solely their own. Content is provided for educational and informational purposes only and eOption cannot attest to its accuracy or completeness. No information provided has been endorsed by eOption.com and does not constitute a recommendation by eOption to buy or sell a particular investment. You are solely responsible for your own investment decisions, and eOption makes no investment recommendations and does not provide financial, tax or legal advice.
Market Undertow Is Heavy – Swing Traders Go To Cash – Day Traders Get Ready To Short
Yesterday the market made a new relative high and it looked like we would continue to rally into earnings season. The tone soured quickly and the S&P 500 fell 50 points, closing on its low. The selling pressure was heavy and we are seeing follow-through this morning. I’ve been warning you for weeks that the upside rewards are smaller than the downside risks and to go to cash. I believe that the selling pressure will build in coming weeks.
Tech earnings typically attract buyers. Netflix, Microsoft and Intel have been the first to report and in each instance they retreated. The market rally has been narrowly defined and tech has led the charge. Many tech stocks are overvalued and they are vulnerable to profit-taking. The majority of the market has lagged behind.
Financials, retail, restaurant, airlines, hotels, industrials, and energy companies employ the vast majority of workers. The PPP is going to run out and businesses will have to lay off workers. The initial $6 trillion stimulus plan has almost been spent and the plan would have worked well if the virus had subsided in May. The “sugar high” would have gotten us through the rough patch, but the virus has been stubborn.
Asset Managers were willing to buy equities knowing that the government had provided a safety net. With interest rates near historic lows, bond yields did not keep pace with inflation (negative real returns) and stocks were attractive on a relative basis. This fueled the market rally.
Economic data points have been positive, but the PPP inflated the rebound in job growth. Without it, unemployment will grow. Yesterday we saw that 1.4 million people filed for unemployment claims and that was higher than the 1.3 million that was expected.
China is the litmus test for the economic recovery and they have a three month head start. Exports only increased by .5%, imports only increased by 2.7% and retail sales only increased by 1.8%. During the recent Dragon Boat Festival attendance was down 49% and revenues were down 69%. This does not reflect pent-up demand and a “V” bottom recovery.
The Coronavirus continues to spread and the states that have retreated to Phase 3 account for 50% of domestic GDP. Many cities are considering a complete shutdown. Politicians are haggling over another $1 trillion stimulus plan and it won’t be enough. They did not hesitate in April and they went “full out”. There isn’t another $6 trillion that they can throw at the problem.
Credit across the spectrum (consumer, municipal, state, federal and corporate) is strained. This is my biggest concern and I sense that a credit crisis is looming. I hope I’m wrong, but I am seeing warning signs.
US relations with China have deteriorated and this is reigniting trade war concerns. The US forced China to close its consulate in Houston and China retaliated by forcing the US to close its consulate in Chengdu.
Three of the major tech companies (Netflix, Microsoft and Netflix) dropped after reporting earnings. Tesla has been a high flyer and it also staged a gap reversal after posting Wednesday. Good news is priced in and profit-taking is starting to settle in. Earnings season is front0-end loaded and that keeps buyers engaged. Apple, Google and Amazon will report next Thursday. I expected to see a decent market bid until those earnings, but recent selling tells me that profit takers are anxious and they won’t wait for the news (they want to sell when the bid is still strong).
I’ve been advising swing traders to go to cash for the last two weeks and I have been pointing to this timeline. Yesterday we had a gap reversal off of a relative high and we are seeing follow-through selling this morning. Swing traders should patiently wait on the sidelines for the next opportunity. We are closing all of our bullish put spreads today. They are far out of the money and they expire today so we can buy them back for pennies. We have one bullish put spread that expires next week (SPCE) and
we can also buy that back for pennies since the spread is $10 out of the money. We’ve had an incredible run the last six months and it is time to take a breather. The market has been in a 10-year bull rally and I won’t suggest buying puts for swing traders. The market drops have come instantly and so have the bounces. You have to be an extremely nimble trader who is engaged every day (and all day) to take advantage of these moves. Until that long-term trend has changed, I won’t suggest shorting the market to less active traders. Swing traders should be in cash ahead of market declines and they should reenter once support is established. That is how I handle my commentary for swing traders.
Day traders have an opportunity to short this market. I feel that the bid will weaken today and I expect to see selling into the close. Watch for consecutive long red candles that close on their low this morning (five minute bars). Brief bounces that last 20 minutes and fail will be a sign that the market is heading lower. We will use the 1OP indicator to time our entries and exits. If I am completely wrong and the market establishes support, I will trade smaller size on the upside and I will set passive targets. I am much more interested in shorting today. There could be some bearish lottery trades that set up in the last hour.
Support is at SPY $319.50 and $312. If I am short and the market closes on its low today I will hold some of those positions over the weekend.
Swing traders stay in cash. Day traders get short.
Content is provided by OneOption, LLC, which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the OneOption content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.