Posted 9:30 AM ET – The S&P 500 is up 50 points before the open this morning and traders are assessing the threat of the Onnicom variant. Even before this discovery, parts of Europe were in shut down mode. Stocks are priced for perfection and the backdrop is anything but perfect.
1. Gains from light volume rallies are easily stripped away.
2. Year-end seasonal strength is likely to keep the dips brief and shallow.
3. No one knows if the new variant is more contagious and we do not know if the vaccines will fight it.
4. The credit crisis in Turkey reminds us that many sovereigns are sitting on mountains of debt. Turkey’s credit crisis should not have much of a ripple effect.
5. Goldman Sachs has been very dovish and they were not expecting any rate hikes in 2022. This was their stance just a month ago. Now they are talking about tapering at double speed and 3 possible rate hikes in 2022. This is a complete pivot and the FOMC meeting on December 15th could be a speed bump.
6. Stock valuations have not been this high since the 2000 tech bubble.
What does all of this mean? From a short term trading viewpoint (less than a month) it is another sign of uncertainty and two-sided price action. I have been mentioning for weeks that the opposing forces are very strong and that this is a low probability trading environment. Central bank tightening, global credit concerns, persistent inflation (not transitory) and complacency (confirmed by a low VIX) are potential spoilers for a year-end rally.
How should swing traders react? In my comments Friday I suggested that you should not panic during a holiday shortened session. If you have a lot of market exposure, the bounce this morning will provide an opportunity for you to lighten up. Evaluate the price action today. Watch your stocks and make sure they are maintaining relative strength and the key technical support levels that you were leaning on. Your short strike price should be below that point if you follow our method. For longer term swing trades I still prefer selling out of the money bullish put spreads. They will allow you to keep your distance and to take advantage of accelerated time decay.
What should day traders do?
The overnight bounce has a strong head of steam. A series of consecutive long green candles with little overlap would lead to a “gap and go” rally. That move would erase most of the losses from Friday and I will not be chasing that move. It would take us close to the all-time high and the drop Friday was a warning. The market has had two years to adjust for the virus and each new variant will not pack as much “market punch”. For this reason I believe that other forces were also in play Friday. In last night’s video I looked back at other market dips in the last year. Long red candles like the one we saw Friday typically lead to another round of selling. Stay balanced today. We should see two-sided trading and I feel there will be opportunities on both sides.
Support is at SPY $453 and $457. Resistance is at $464.