Market Is Ignoring Hot Inflation – Here’s How I Will Trade Today

Posted 9:30 AM ET - Yesterday we learned that consumer prices rose .9% and that news eventually sparked profit taking. This morning the PPI rose by a very “hot” 1% and I suspect the Fed Chairman will be peppered with inflation questions when he testifies before Congress today. The market is taking the inflation numbers in stride and the S&P 500 is up 15 points before the open. Earnings season has officially started and that is what traders are focused on. Tech stocks have been particularly strong and AAPL asked suppliers to increase production by 20%. The stock is up 2% before the open and it is providing a strong backdrop for tech stocks. Even with the drop in TLT yesterday (higher interest rates), AAPL, AMZN, GOOG and MSFT rallied on the open. This is contrary to what we saw a few months ago when yields were rising and the tech sector was weak. This is a sign that earnings expectations for tech companies are high. Mega cap tech stocks will report in 2 weeks. 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. 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". Yesterday I mentioned that the market would ignore the hot CPI number and we rallied right out of the gate. Today we have a gap up that could challenge the all-time high. This is my least favorite scenario for day trading. The news from AAPL will spark buying in the tech sector. Tech companies have relatively little exposure to inflation so I will be looking to buy these stocks. On the other hand, industrials have a lot of exposure to higher input costs and it takes time for them to pass those costs along. I will be looking for shorting opportunities in this sector. Option Stalker day trading searches have helped us find opportunities on both sides of the market. If the market challenges the all-time high and it stalls, I will be looking for relative weakness and I will favor the short side. If the market blows through the all-time high on the first attempt I am likely to buy tech stocks on the first pause or dip. Bull market rallies with this type of momentum are very hard to turn. Yesterday it took a few hours before we saw any selling pressure and we could see the same today. 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 SPY $435 and resistance is at $437 and $440. . .

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