September 3, 2020
Posted 9:30 AM ET - I have not been bearish since the market found support in March. This week I have been highlighting technical reasons to be on the sidelines and I believe that we are due for a deep and brief pullback. This is not something that long-term investors need to worry about, but it is of concern to short-term traders who use leverage. I don't know if the market drop is coming today, but it is likely this month. It’s hard to imagine that the S&P 500 is trading at an all-time high when Q2 profits were down more than 30% on average year-over-year. The second wave of the Coronavirus will also damage Q3 earnings and an economic "V" recovery is unlikely this year. Stocks are trading at a rich P/E of 23 and we are not seeing pent-up consumer demand. Small businesses will not get another lifeline from the government and layoffs have been announced. Initial jobless claims improved slightly, but 881,000 new applicants filed for benefits last week. The next round of layoffs will come at the state and municipal level. Chicago is one example and the city will run a $1.1 billion (or more) deficit next year. Lay-offs are planned and the city is looking for a government bail-out. The average American lives paycheck to paycheck and they would be kicked out of their apartments if not for an eviction moratorium. A new vaccine could be available as early as November, but the virus has changed lifestyles forever. Large corporations are reducing office space in major metro areas and employees are working remotely. Companies are saving money and productivity has improved. There are many other societal changes that will take root. This means there will be opportunities. Tech companies have certainly benefited from this trend. Imagine the progress that America could have enjoyed if it spent $6 trillion on roads, bridges and airports. Unfortunately, credit levels in our country are so stretched that the money had to be used to keep food on the table for the average worker. During the 2008 financial collapse we had the "largest stimulus bill ever". It was $1 trillion and 12 years later we needed six times that amount to keep the country afloat. I am painting a very dire picture, but as a short-term trader I'm not overly concerned about a long-term market decline - yet. This $6 trillion had to go somewhere and bonds are not an option since yields are generating negative real returns. The money has flowed into the stock market and we are seeing a buying climax. My time perspective from a trading standpoint is less than one month. I am aware of longer-term macro issues, but I don't dwell on them. When it's time to get short I will see the warning signs. Right now I do see elevated risk for the rest of the month. I believe that we could see a very fast market dip to SPY $337.50. That was the previous high from February and it represents support. That level also coincides with an upward sloping trend line on a daily chart. During this pullback we will have an opportunity to gauge the selling pressure and the appetite for stocks. Typically after a strong run like this the first drop will be purchased. There are still many under allocated Asset Managers who are looking to buy. If you are a novice trader I suggest being sidelined. If you trade from your mobile phone I suggest being sidelined. Robinhood (and all of the major online brokerage firms) have had outages recently. When the selling starts you don't want to lose money because of technical issues. Brokerage firms have lengthy risk disclosure agreements and they are protected. During these market drops we've also seen option bid/ask spreads widen out and it is extremely difficult to exit trades. For most swing traders, cash is the best place to be right now. We have seven out of the money bullish but spreads that will be expiring in the next two weeks and I did not add to new positions yesterday because of the backdrop I've have painted this week. These trades are far out of the money and they are trading for pennies so our risk exposure is low. When we get the market drop we will patiently wait for market support. Once it's established we will have an opportunity to enter bullish trades at better levels. Day traders need to wait for market support this morning. If we get a nice bounce and we enter the gap in the first hour of trading the market will grind its way back. If the market makes a new low for the day after two hours of trading we are likely to drop most of the day (bearish trend day). I have preferred trading from the short side this week and I've been able to make money. Until I see a market drop of more than 50 S&P 500 points I will trade half of my normal size in the morning and one quarter of my normal size in the afternoon. From time to time it's important to take a longer-term perspective on what's happening and I hope that my comments help you to adjust your risk exposure. . .
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