Hot Inflation Will Keep A Lid On the Rally

Posted 9:30 AM ET - The incremental overnight news is very light. This week we learned that CPI rose .9% and PPI was up 1%. Those are very “hot” readings and the market is taking the inflation numbers in stride. Earnings season has officially started and that is what traders are focused on. The Fed Chairman testified before Congress and there was nothing new. The market expects the Fed to start tapering (reducing bond purchases) later this year. Hot inflation could prompt them to move their tightening timeline forward and they have already raised their inflation projections from 2.4% to 3.4%. China’s GDP was up 7.9% and retail sales were up 12.1%. Both numbers were in line with expectations. Earnings estimates have been raised by analysts at the highest rate we’ve seen in many years. Supply disruptions and higher input costs will weigh on profit margins and surprise favors the downside. Banks will dominate the early announcements and profit margins could be pinched by lower yields and softer than expected consumer spending. Swing traders should place an order to sell the 1/2 position in SPY at $430 (stop) and $440 (target). Even if we are stopped out we will still make a little money on the trade. Option implied volatilities are skewed to the upside (calls are more expensive than puts) and this is unusual. It is a sign that Asset Managers are not buying protective puts. This typically happens when the market is in a steady grind higher. They hate seeing these protective puts expire worthless and eventually they stop buying them. This has a couple of implications. First of all, put premiums are very cheap and selling out of the money bullish put spreads does not make sense from a risk/reward standpoint. Secondly, big market drops happen when no one is expecting them. Asset Managers are relatively unprotected and bullish speculators have a "full boat". When the market finally does rollover everyone will try to make adjustments at the same time and that amplifies the selling pressure. The best strategy for swing traders with a 3 to 4 week time horizon is to wait patiently for market drop. Day traders are in the "sweet spot". A down open is my favorite set-up. Relative strength is easier to spot and the drop will provide us with an opportunity to join the longer term uptrend at a better level. The SPY will test the low from Wednesday and we need to make sure that support holds before we buy. Option Stalker day trading searches have helped us find opportunities on both sides of the market. The first good opportunity will come on the long side today when support forms. I believe there will be excellent opportunities on both sides of the market today. Stay flexible and use the 1OP indicator as your guide for the SPY on a 5 minute basis. Support is at the low from Wednesday and resistance is at the high from Wednesday. I expect us to stay in that range. . .

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