Posted 9:30 AM ET – Yesterday the market staged an impressive rally and I thought that we might finally break the cycle of weakness in the last hour of trading. The S&P 500 was up over 50 points and it gave half of that back in the last 45 minutes of trading. This is bearish price action during the two most bullish weeks of the year. Seasonal strength and record profits should have fueled a bounce that never looked back. It’s possible that the elections and the FOMC are keeping buyers at bay, but I still expected better off of a deep low. If the market can’t get back to the 100-day MA this year it will be a bad omen for 2019.
The Brexit deal is 90% completed and all parties agreed that England will be able to access financial markets in Europe. The UK posted a very weak PMI and Europe’s GDP came in at .4%. Politicians need to figure this out so that economic growth can rebound. Until they do, don’t expect a US trade deal.
Official PMI’s out of Asia were also very weak. Global markets are weighing on investors. The spread between emerging market P/E’s and US P/E’s is extremely wide and that gap will narrow. The current trend favors our P/E’s contracting (market decline).
Domestic economic activity is robust and ADP reported 227,000 new jobs in the private sector during the month of October. We should see a strong number in the jobs report tomorrow. The wage component will be critical and it needs to come in at .3% or lower. This would give the Fed a little breathing room.
The FOMC will release its statement next Wednesday. Fed officials have been very hawkish and many analysts believe that they are not taking soft global economic activity into account. If they don’t soften their tone the market will drop. Conversely, a postponement of the December rate hike would spark buying.
Next Wednesday we will also know the election results. Betting lines favor a GOP victory in the Senate and a Democrat victory in the House. This outcome would be fairly neutral to slightly negative. Republicans are trending well and a House victory would be good for the market. It would mean that Trump can continue his agenda without having to battle constant investigations and possible impeachment hearings.
Earnings have been excellent and valuations are reasonable. Investors are worried that the outlook will deteriorate as global activity slides. Apple will post results after the close today. They need to post an exceptional number to tread water. The stock has been able to weather all of the selling in the last month and it is near the upper end of its range. I believe it is vulnerable.
My bias has soured in recent weeks. When the market can’t rally during the most bullish time of the year I take notice. Every bounce has been faded and the pattern of higher opens and lower closes is bearish. Late day selling has been constant and the volume is heavy.
Swing traders need to remain in cash until next Wednesday. We are going to see how the major events play out and the next time we take a position we will have clarity. I don’t make it a practice to pick tops during a nine year bull market. I need to see severe technical damage before I change my bias and the warning signs are apparent. The market has stayed below the 200-day MA for almost 2 weeks and that is a sign of heavy selling.
Day traders need to look for opportunities to get short on the open. The heavy selling from yesterday’s close will spill over this morning. There is a small bid and we saw two-sided action on Tuesday. That paved the way for a nice rally Wednesday. Unfortunately, sellers are undeterred and Asset Managers are in “risk off” mode. End of quarter window dressing should’ve been bullish and sellers took advantage by selling into strength. Look for choppy conditions and favor the short side early. Use the first hour range as your guide.
I’m expecting a choppy directionless market ahead of major events next week.