Posted 9:30 AM ET – Last week the S&P 500 closed firmly above the 200-day MA and tech stocks were particularly strong. I believe that end of month fund buying and earnings season in two weeks will keep buyers engaged.
The issues plaguing the market (inflation, Fed tightening and the war in Ukraine) have not improved, but the initial shock of these events is starting to wane. The first rate hike by the Fed will not have much of an impact, but there is chatter that they might hike 50 basis points at the May meeting and perhaps another 50 basis points in June. This will make Asset Managers nervous as we get closer.
The economic calendar is heavy this week. ADP and the jobs report will be in focus as traders gauge the strength of domestic economic activity. China’s numbers on Wednesday will be of greatest interest.
Covid-19 cases are rising in China and much of the country is shutting down. This will add to current supply disruptions and factories closed. Delisting for Chinese companies is still possible and that decision could be influenced by China’s support for Russia. They also have real estate developers who are not reporting earnings and who are perilously close to default. A credit crisis in China is the biggest threat to our market. Even if that does not manifest, I feel that Chinese stocks present a good shorting opportunity. Wait for weakness in US markets for those shorts or carry a few of these shorts to hedge your longs.
Swing traders with a 2-3 week trade duration can sparingly sell out of the money bullish put spreads on strong stocks. I still believe that we will have more market volatility this summer, but we have reached a resting point. The 25 basis rate hike means little and it will not impact our economic growth. The market is paying less attention to the war in Ukraine and earnings season is approaching. That should keep buyers engaged for a few weeks. As earnings season unfolds I believe that the selling pressure will build. Earnings estimates for the year have been reduced by many analysts/institutions and guidance could be soft. As we get closer to the May FOMC meeting the selling pressure will resume. A 1% rise in interest rates this summer would keep Asset Managers on the sidelines. Take advantage of this “window” for a few weeks and return to the sidelines for longer term swing trades.
Day traders should expect two-sided action. This is a news driven market and we are trapped between the 200-day MA and the 100-day MA. I am favoring the long side, but only because of the momentum last week. Monitor the early action and watch for sector rotation. Tech has been relatively strong in the last week and Chinese stocks have been weak. If the market is able to close above the 200-day MA this week it will embolden buyers and we could poke through the 100-day MA.
Support is at the 200-day MA and resistance is at the 100-day MA.