Market Pricing In Positive Outcomes – Here Are the Spoilers

Posted 9:30 AM ET - A US/China trade deal is likely and the market gaped up on the news. This was largely priced into the market and stocks gradually drifted lower the entire day. Horizontal resistance at SPY $281 held and we are seeing a little follow-through selling this morning. The Fed chairman will testify before Congress today, but don't expect anything new. Major economic releases will be posted Thursday morning and that will be the next catalyst. The Fed has been very transparent. The FOMC minutes last week were dovish with regard to balance sheet reduction and hawkish with regard to rate hikes this year. I’m not expecting much of a reaction to Powell’s testimony. President Trump is meeting with Kim Jong-un in Vietnam. They will exchange "niceties", but there won't be any major developments. Theresa May wants to stop England from leaving the EU without a deal. This would require another vote and the main opposition leader seems to support a second referendum. The EU would have to agree to an extension beyond March 29th. They have been steadfast during this negotiation process and they are not going to make it easy for England to leave. Official PMI's will be released Thursday morning and this will give us a sense for China's growth. The PBOC has been very "loose", but economic conditions are contracting. Europe and Japan posted soft flash PMI's a week ago. Traders will be watching GDP Thursday morning to see if weakness abroad is spreading into our economy. Retail sales, durable goods orders and the Philly Fed all came missed expectations recently. Earnings season was excellent, but stocks are trading at the upper end of their valuation range (forward P/E of 16). Good news is priced into the market. Any snag in the US/China trade negotiations would spark selling. Now that the market has recovered the Fed could provide a timeline for the next rate hike. The market is not pricing in any rate hikes and most Fed officials are expecting at least one hike this year. Brexit could get ugly if the EU does not extend the deadline. Central banks are prepared to backstop trillions of dollars in derivatives trades. Trump will set a trade deadline with Europe and he is frustrated by the lack of progress. US economic conditions could falter due to slowing global activity. There are many issues that could sour in the next few weeks and the market is pricing in positive outcomes. Swing traders should short the SPY if it trades below $274. Use $276 as your stop on a closing basis. The upward momentum is starting to stall and the selling pressure will build at this major horizontal resistance level (SPY $281). It's hard to stay sidelined when the market is up 10 S&P points every day, but one nasty day can strip all of those gains away. The risks outweigh the rewards and I believe the next big move is down. Day traders should wait for the early action to play out. The recent rally won't die easily and it will take a news event to spark heavy selling (no news today). We are likely to see choppy trading as buyers and sellers pair off today. If the market makes a new low after the first hour of trading, favor the short side. Intraday volatility has been low and day trading has been difficult. We need momentum during the day. Keep your size small and your activity low during this stretch. The economic news Thursday morning will be important. I believe the selling pressure will increase with each release. . .

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