Bull markets die hard when the Fed is printing money. With interest rates at historic lows, bond yields do not keep up with inflation and they generate negative real returns. Stocks are deemed to be the best investment alternative and all of that money is sloshing around looking for a home. This is an incredibly powerful market force and we won’t see a sustained market decline unless there is a credit crisis.
The FOMC said that they are considering tapering and the table seems set for a formal schedule in November. Most analysts believe that it will start in 2022 and end mid-year. Rate hikes are still not being priced in until 2023.
China said that they will provide liquidity to the banking system and they added $17B overnight. They need to get ahead of the curve on this and investors are wondering if the issue is widespread. China’s market has been retreating most of the year and that is a warning sign. I suspect that this goes well beyond Evergrande.
Evergrande will make the coupon payment. That has everyone breathing easier. I went back to 2007 and I started reading articles on Countrywide. They were the canary in the coalmine for the 2008-2009 financial crisis in the US. The news was completely discounted and it took another year for the full extent of the crisis to surface and for the market to react. When it did, the selling was fast and furious. I don’t know if Evergrande is a sign of things to come, but I do know that we need to be watchful.
The debt ceiling needs to be raised in September and politicians will take this down to the wire.
Swing traders with a 3-4 week time frame can start selling some OTM bullish put spreads. Focus on stocks with relative strength that have major technical support close by and sell the spreads below that support. If that support is breached, buy the spread back. I would not go overboard and I would not use a more bullish strategy. This strategy is neutral to slightly bullish. I still suspect that the SPY will probe for support in the next two weeks and make a higher low. Upon that successful retest you can get more aggressive with longs. I am expecting the 100-day MA to hold.
Day traders should watch for a possible gap and go today. The market found support and it is in the gap from Monday. I do not like to chase on the open. If you see consecutive long green candles closing on the high with little to no overlap on an SPY M5 chart in the first 30 minutes you will need to enter your longs early (trade smaller size). I would prefer a compression on the open that holds the overnight gains. That would give me time to find the best stocks and to scale in. It is important that the compression holds for at least 30 minutes and that it does not retrace at all. That is a sign that buyers are lined up. If we see selling in the first 30 minutes, be patient and wait for some of the overnight gap to fill. This is actually the best scenario for us because relative strength will be easier to spot as the market dips. This will also provide us with excellent entry points. The scenarios on the open are listed in order from least aggressive to the most aggressive set up for us. The storm cloud has passed and buyers will be fairly aggressive now that major support has been tested, the Evergrande coupon has been paid and the FOMC statement has passed.
Support is at the 100-day MA and resistance is at the 50-day MA.