Bearish Sentiment Is High – Buy A Market Bounce Off Of This Level
Posted by Pete Stolcers on November 20
Posted 9:30 AM ET – Typically the market would be grinding higher this time of year. Strong earnings and consumer spending would fuel a gradual rally into Thanksgiving. Asset Managers would maintain a firm bid so that stocks finish on their high of the year. Investors are happy because their portfolios are doing well and Wall Street bonus checks are fat. This is a very predictable force and its absence is concerning. The tone has soured in the last two months and we could test the October low today.
There wasn’t any incremental overnight news to justify a 40 point S&P 500 drop before the open. This is the culmination of all of the negatives I have outlined and they are eroding investor confidence.
Italy plans to run large deficits next year and it doesn’t care about EU guidelines. European officials will respond to Italy Wednesday. A Brexit deal is close, but officials (France and Germany) want to add hefty penalties to discourage other members from ever leaving the union.
The G20 meeting is approaching and both sides are miles apart. A cease-fire and a commitment to negotiate a deal is the best outcome we can hope for. If Trump increases the tariffs from 10% to 25% during the process China will walk away from the table.
The Fed will hike rates in the middle of December and their tone remains hawkish. Traders are worried that the Fed is missing the global picture. Economic growth is slowing and 3 to 4 rate hikes are still planned for 2019 (market is pricing in 2 hikes next year).
Warren Buffett once said, “When the tide goes out you find out who is wearing a swimsuit.” The economists have raised the likelihood of a US recession (low tide) in the next two years (35% chance). During an economic slowdown some companies will be unprepared and credit issues will surface. These issues will be micro (companies) and macro (sovereign).
Corporate earnings have been robust, but the comps will be much tougher in Q4 because the tax cuts went into effect a year ago. Input costs (wages, raw materials and tariffs) will bite into profits.
Bearish sentiment is growing. I consider SPY $263.67 to be support, but the intraday low was roughly $260. The first level could be tested today.
Swing traders will take a half position at $263 and add the second half at $260. We will not place a stop until we are filled. I believe that the G20 meeting could spark a nice bounce.
Day traders – if the market continues to drift lower after two hours of trading – try some shorts and be very careful. The snap back rallies will be violent now that bearish sentiment is high. Shorts can and will be squeezed from this level. I will be waiting for support. It might come early or it might come in the last two hours of trading. I want to focus on the long side. My longer-term bias has shifted to bearish, but I believe that a bounce is coming. I don’t plan on carrying any overnight longs until I see buying in the last hour of trading with follow through the next day.
From a technical standpoint there are signs that the market is ready to roll over. We won’t get much of a year-end rally and that is a bad omen for 2019.
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