Eliminate the Temptation To Force Trades In This Dull Market – Take Time Off

Posted 9:00 AM ET - The S&P 500 for all intents and purposes is at the all-time high. Resistance is stiff and the market lacks a catalyst to push it through. The news cycle is light and that favors the current momentum. Know that light volume rallies can easily be stripped away. My comments will be brief this week. We are in the "dog days" of summer and traders are taking time off. Earnings season is behind us and the economic releases will be minor for a couple of weeks. Politicians are busy with their respective conventions and a stimulus bill is unlikely before Labor Day. The market had priced in a $1.5 trillion aid package and we could see profit taking if businesses start to lay off workers. The S&P 500 is trading at a current P/E of 23 and that is rich by historical standards. Stocks need time to grow into current valuations. The second wave of the Coronavirus will delay the economic recovery and Q3 earnings will not impress. It's possible that the market treads water the rest of the year, but a more likely scenario is a 10% correction and a post-election rally. The upside reward is smaller than the downside risk. Swing traders who can't watch the market intraday should be in cash. If the market treads water and the macro backdrop improves, we will have clarity in a few weeks that we didn't have now. At that time we can decide if we want to take new positions. If the market drops we will be able to gauge the selling pressure and we will be able to enter bullish put spreads at a much better level. Both scenarios favor a cash position for the next few weeks. Day traders need to be cautious. The five-day average true range (ATR) for the S&P 500 has declined from 67 points a month ago to 20 points now. Intraday volatility is tanking and that makes it more difficult to day trade. Expect tight ranges and moves to both extremes during the day. Be patient and trade reversals at those extremes for the highest probability set ups. Given that the intraday range is so tight you can also trade stocks with strong upward momentum early in the day without worrying too much about a big market drop. I am trading half of my normal size in the morning and a quarter of my normal size in the afternoon. I won't be trading or posting market comments Thursday or Friday. Take time off and eliminate the temptation to force trades in this low probability environment. . .

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