Daily Commentary: March 12, 2021

Jeremy Engelbrecht1Option Commentary

The Market Is A Discounting Mechanism – Sometimes It Over-shoots

Posted by Pete Stolcers on March 12

This week the S&P 500 has rallied 140 points from its low. Optimism over the $1.9 trillion stimulus bill had buyers excited and sellers were passive ahead of the signing. Now that the bill has been passed we will be able to gauge the true appetite for stocks. I am still fairly market neutral and I feel that there will be opportunities to buy.

Yesterday it felt like the market was going to make a new high and never look back. As the day wore on we saw selling in the afternoon and the S&P 500 is down before the open today. Much of the gains from yesterday have been given back and resistance is fairly stiff at the all-time high.

New Coronavirus cases are declining and vaccinations are ramping up. States are poised to reopen and people are anxious to resume their normal lives. This excitement is fueling investment and it’s important to keep your perspective.

US 10-Year Treasury Notes (TLT) are making a new low for the year this morning and interest rates are rising. The PPI was in line this morning and I don’t believe that inflation is a major reason for interest rates moving higher.

Rising bond yields have been hampering tech stocks and the NASDAQ is down 1.5% this morning. As I’ve been mentioning in my videos, we don’t know if the NASDAQ 100 is going to make a higher low after bouncing off of the 100-day moving average or if this is a bearish flag formation on a daily chart.

Global markets are not keeping pace with the S&P 500. In fact, China’s stock market is down 15% from its high and it is officially in correction territory. Their economy reopened eight months ago and I believe that there market is telling us that the recovery will take time. Europe is still struggling with the virus and vaccination distribution has been terrible relative to the US.

Stock valuations are still high and they need time to normalize. The market is a discounting mechanism and sometimes it gets ahead of itself. In the next two quarters profits will grow and we will be able to gauge the strength of the economic recovery.

My message to swing traders is to remain calm. I am not bearish; I just feel that we will have lots of opportunities to buy stocks that we like. Don’t feel like this is your last chance to buy your favorite stocks. There are opportunities to sell out of the money bullish put spreads and there will even be some opportunities in the tech sector. Keep your activity fairly light until we get the next market dip. These market declines help us identify relative strength. Look for tech stocks that have been able to weather the decline. Google is a classic example. It has been able to maintain support while all the other tech names have dropped. When the market does finally find support, Google will rally. Selling out of the money bullish put spreads below technical support makes a lot of sense when these stocks dip. Heavy volume, relative strength and technical breakouts help us identify the best candidates for this options trading strategy. It allows us to navigate this market volatility and it provides us with a cushion. Sell your out of the money bullish put spreads inside of a three week window so that you can take advantage of accelerated time premium decay.

Day traders should go with the flow. I still favor the upside and that is where I’m seeing the most consistent price movement. Wait for the market to find support this morning and buy stocks with relative strength. Down opens in a bull market are my favorite set-up and this will be a good trading day. If the market is making a new low after two hours, favor the short side. If the market is making a new high after two hours, favor the long side.

Support is at SPY $390 and $392. Resistance is at the all-time high.

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