August 5, 2020
Posted 9:30 AM ET - In February the SPY hit a high of $339 and this morning we will only be seven dollars from that level. The bottom line carnage in Q2 has been completely ignored and a "V" shaped recovery is priced in. Politicians are scrambling to approve a $1.5 trillion stimulus package before they take recess and that is fueling the rally. The Coronavirus continues to spread and it is impeding the economic recovery. The upside rewards are smaller than the downside risks and I am waiting patiently in cash for a better entry point. More than half of the S&P 500 has reported earnings. On average, revenues are down 8% and profits are down more than 30%. Expectations for Q3 are very high and there is room for disappointment given the sluggish economic recovery and soft consumer spending. Ten stocks in the S&P 500 are up 35% on average and the remaining 490 stocks are down 10% on average this year. This statistic demonstrates how narrowly defined the market rally has been. Tech continues to surge higher, but this sector does not employ many workers on a percentage basis. Jobs are heavily concentrated in restaurants, hotels, transportation, finance and retail. These businesses are struggling and many will fail because they can't go months without cash flow. For the last two weeks have been mentioning that this will eventually bear out in the employment numbers. This morning ADP reported that 167,000 new jobs were created in the private sector during the month of July. That is way below the 1.6 million jobs that were expected. I trust ADP's number because they process payrolls for small and medium-sized businesses and they know how many checks they "cut". The next round of stimulus is 1/4 of what we had a few months ago and businesses will have to lay off workers. The restaurant industry employs about 8% of the total workforce and according to a Bloomberg analyst, one third of all restaurants are likely to fail in 2020. This is one sliver of what's happening across the entire economy. British Petroleum announced a $6.7 billion loss and there will be many high-paying job cuts. Many oil producers are missing their bond payments. The Gap (retailer) is not paying its rent. I could go industry by industry and report the devastation, but you get the picture. Jobs are the key to the economic recovery and workers will be worried about their employment. Consumer spending will contract and that will lengthen the recovery. In October, 23 million people could be evicted from their apartments and 12 million people did not pay their rent in May. The Fed is printing money as fast as it can to ward off a credit crisis. "The market climbs a wall of worry." This is an old market adage and it's important to know when the concerns are legitimate and when they are exaggerated. I don't like what I see and there are many cracks in the dam. Swing traders need to stay in cash. I don't know how long or how deep the next market decline will be, but I am confident that there will be a better entry point. Once the selling starts I will be able to gauge the selling pressure and I will be able to determine when it's time to buy. The market is in a 10 year bull rally and I won’t suggest buying puts to those who can’t watch the market during the day. The moves down and the snapback rallies have been violent. Your best play is to wait for a market drop and for support to be established. Day traders will have excellent opportunities on both sides. For now, buy tech stocks on dips. We have been able to catch some nice trades during the course of the day. I will be watching for late days selling and follow through. Once key technical support levels have been breached on a daily chart, I will get more aggressive and I will focus on the short side. If the momentum builds I will consider overnight shorts. The final leg of the rally has been brisk. Ride the momentum, but don't overstay your welcome. I have been trading half size in the morning and quarter size in the afternoon. The Heavy Buying search in Option Stalker has been a favorite right on the open each day. Watch the weekly jobless claims numbers. If they continue to trend higher it will be a warning sign. After the jobs report on Friday, the action will subside and we will head into a “news vacuum”. I expect to see profit-taking after the stimulus deal is signed. Politicians will flee DC (three week recess starts August 10th) during a time of great uncertainty and investors will get nervous. . .
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