New Market High – Ride the Wave – Lots of Dark Clouds – Use Stops
Posted by Pete Stolcers on September 21
Posted 9:30 AM ET – The S&P 500 broke a new all-time high yesterday. Quadruple witching fueled the move and anyone who sold out of the money September calls above the prior high was forced to cover. Strong profits and robust domestic activity are in focus and investors are ignoring pending news. We will ride the wave and we will raise our protective stop.
Flash PMI’s were in line and global markets were generally positive overnight. Initial jobless claims fell to their lowest level in decades. Next week GDP will be posted and the Atlanta Federal Reserve is predicting 4.4% growth.
The FOMC statement will be released Wednesday and rates will increase. US treasuries are testing major horizontal support and the market has reacted negatively when we have poked below these levels. Wage inflation will keep the Fed in tightening mode. Typically the statement is dovish after a rate hike, but that softer tone has been missing this year. As long as the market keeps making new highs the Fed will keep its foot on the brake. At best the statement will be neutral next week.
Higher interest rates in the US will make borrowing more expensive in emerging markets. Many countries are seeing currency devaluation and yields are spiking. We need to monitor credit markets very closely.
Trade negotiations with China are deteriorating. Trump will increase the rate from 10% to 25% after the November elections. He wants to see if China will negotiate a deal before then. China is not likely to facilitate Trump and they would prefer that Democrats win the House. This would stall Trump’s agenda. China has threatened to cut supplies of key electrical components and they might lower tariffs for all other trading partners. They have been selling US treasuries as well.
An important trade deadline with Canada passed. Trump wanted to cap Canadian car imports and that is a “sticky point”. Trade officials want to lock in a deal with Mexico before their new president takes office December 1. NAFTA is set to expire and the clock is ticking.
Trade negotiations with Europe are at a standstill. They can’t come to terms with one of their own members (England) so we should not expect any progress. Trump has extended a grace period, but he will not let this go on indefinitely.
Tensions in Iran will escalate ahead of the November sanctions.
Polls suggest that Republicans will lose the House in November. The market likes Trump’s policies and this outcome would weigh on the market.
There are many potential landmines and the headwinds will be stiff. I don’t believe we will see a runaway rally. When the market does not pull back in August or September the year-end rally tends to be muted. We can expect three steps forward and two steps backwards into year-end. Swing traders should raise the intraday stop on the SPY to $290. We will keep moving our safety net higher.
Day traders should look for opportunities to get long today. Quadruple witching will result in choppy conditions.
We will have more clarity after the FOMC statement next week.
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