Market Could Hit An Air Pocket – Here Are Your Buying Instructions!
Posted by Pete Stolcers on October 9
Posted 9:00 AM ET – The market has not had a meaningful pullback in over three months and we were due for a round of profit-taking. Bullish sentiment was extremely high and speculators are getting flushed out. Higher interest rates and a trade war with China are to blame. Once this wave of selling runs its course, a buying opportunity will present itself. Earnings season will keep buyers engaged and Asset Managers will buy stocks into year-end.
The trade talks with China have stalled and nothing will happen before the November elections. Both sides are exchanging punches and the PBOC just lowered bank reserve requirements (liquidity injection). Xi has also instructed the media not to report negative economic news. US military exercises in the South China sea and a defense contract with Taiwan are also adding to the tension. China imports 25% of Iran’s oil and they could increase that amount to negate the impact of US sanctions. In short, a prolonged battle is brewing.
Trade negotiations with Europe are at a standstill. The EU is focused on getting a Brexit deal done. Nothing will happen before the November elections.
The Fed has been hawkish and interest rates are moving higher. US 10-year yields are at 3.25% and they are moving through major resistance. The initial reaction to higher rates is bearish, but that will subside when economic growth and moderate inflation are confirmed. The wage component of the Unemployment Report was .3% last week and that is a neutral number. Anything above that would be problematic.
In my comments I’ve mentioned that higher US rates will have a ripple effect around the globe. Emerging market rates are rising and mini credit concerns are surfacing (Italy, Turkey, Pakistan, Argentina, Venezuela and a number of other countries). These countries have been on the ropes for years. Credit conditions need to be closely monitored, but I don’t see this as an immediate threat in 2018.
Domestic economic growth is strong.
Earnings season will begin this week. Typically, mega cap tech stocks have kept buyers engaged because they spark optimism. That is not the case this quarter. Facebook, Twitter, Netflix, Alibaba and Bidu have been weak. Apple and Amazon have accounted for 30% of the S&P 500 rallied this year. Heavy concentration is not healthy for the market rally and we need to see broad-based participation. At a forward P/E of 17, stocks are priced for excellent news.
Swing traders should be in cash. We have been waiting for a pullback and we are getting one. The market needs to hit an air pocket and we need to see an intraday reversal. Support at SPY $282 could be in play and that is the 100-day moving average. If the SPY trades below $281.50, buy it when it crosses back above $282 at any time (intraday). I don’t believe that will happen today, but we might as well have an order ready.
Day traders should look for an early bounce that stalls. Once the market starts to roll over, get short. Use SPY $287 as your guide. As long as we are below it you can get fairly aggressive with your shorts. Take profits if the market drops very quickly. A snapback rally is possible and I will be watching for it. That deep trough and reversal will signal that we are close to the low.
Swing traders need to start lining up bullish candidates. We were hoping for a pullback and we got one. Now we have to be ready to fire if support is established.
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