Market Needs Its “Fix” Now – Reduce Risk and Don’t Count On Politicians

Posted 11:00 AM ET - Sorry for the late post. I was busy exiting positions and I forgot to post. Yesterday the market saw a steady round of profit-taking and Asset Managers are reducing risk ahead of the election. Covid-19 is spreading quickly in the US and much of Europe is shut down. A stimulus bill is needed and Nancy Pelosi's deadline for a deal ends today. I am closing down my swing trading positions and I am reducing overnight risk. Some analysts are saying that the market decline was related to the stimulus bill impasse. That is true only to the extent that the prospect of a pre-election deal has kept buyers engaged. That bid was offsetting the selling pressure and without a deal the market could drop before the election. Regardless of who wins the election, a stimulus bill will be the first matter of order. This wave of the virus is weighing on economic activity and credit issues will surface if fiscal stimulus is delayed by more than a month. My greatest election concern is that a winner will not be known for weeks and the country will be in limbo as the need for fiscal stimulus rises. We could also see a lot of civil unrest during the process. Vaccines could be approved for emergency use by the end of the year and AstraZeneca feels that it will start mass distribution of its vaccine before Christmas. This would certainly improve the backdrop. Earnings season has started and analysts are projecting a 20% year-over-year decline in earnings for Q3. Tech giants will report next week and the results should be excellent. Netflix will report earnings after the close today. At a current P/E of 23, stocks are rich. Domestic economic activity has been decent, but job growth has been sluggish. China's numbers last week were excellent. Imports increased by 13% and exports increased by 10% percent. GDP increased by 4.9%. China is rebounding nicely and those stocks will be in favor. From a technical standpoint I thought we might see a bullish flag formation and a rally back to $354.. This was a critical moment for the market and instead we have a lower high double top that suggests lower prices. Consequently, we need to reel in our bullish put spreads. I believe the 50-day moving average will be challenged. If the stimulus bill is not passed today we could see a nasty round of selling. Swing traders should reduce risk. We have 7 bullish put spreads and I believe we can break even or make a little money on all but two of them. We will try to buy them back at our entry price on the open today. By the end of the day we should only have two open positions. I will manage those based on the stock's relative strength and market support at the 50-day moving average. I thought that the market would tread water until the election and I was wrong. We will error on the side of caution and we will reduce risk. Day traders should look for more selling. The S&P 500 has been drifting lower the last few hours and the overnight gains are slipping. I don't believe we will have a meaningful rally until the downside is tested. Profit takers will keep the pressure on and buyers need to hear positive news from Nancy Pelosi and Steve Mnuchin today. I don't believe that news will be released during the day. If the self-imposed deadline is extended, that would be a sign of progress. The next two weeks should be excellent for day trading and we will be in "hand-to-hand combat". The intraday ranges should be excellent and we need to watch for reversals. Support is at the 50-day moving average and resistance is at $349. Reduce overnight risk exposure and focus on day trading. . .

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