July 17, 2020
Posted 9:30 AM ET - The market has been trading in a range between SPY $312 and $322 for the last two weeks. Economic releases have generally been good and earnings season will keep buyers engaged. New Coronavirus cases are growing and the economic recovery will take much longer than expected. These opposing forces have kept the market in a trading range. The upside reward is smaller than the downside risk and you should take this opportunity to lock in profits. I believe that a market decline is likely in August. ADP, the Unemployment Report, ISM manufacturing and ISM services were all strong a week ago. Initial jobless claims came in higher-than-expected (1.3 million yesterday) and many states have rolled back to Phase 3. Many major metropolitan areas are initiating a complete shutdown. An article featured in The Hill, projects that 23 million people will be evicted in October and that 12 million people missed May's rent payment. Politicians are discussing another $1.3 trillion stimulus package. US trade relations with China are a bit strained this week and Hong Kong's favorable trade status was removed. The Dragon Boat Festival attendance was down 49%, retail sales increased by only 1.8%, exports grew by a dismal .5% and imports only grew by 2.7%. These are not the numbers anyone had hoped for and China reopened in April. Banks have dominated earnings releases this week and bad loan write-downs are jumping. Bank of America reported a $4 billion write down yesterday. Credit concerns are likely to surface in the next month as the economic recovery stalls. Netflix reported earnings yesterday and the stock is down approximately 10% overnight. It has a unique business model and I don't believe that it will have a major impact on other tech companies. However, it is a sign that tech stocks are priced for perfection. Earnings season will kick into high gear next week. My concern is that the bottom line destruction will be greater than feared and that guidance will be "light". The market rally has been heavily concentrated in a handful of tech stocks. Amazon, Apple, Facebook, Google and Microsoft account for 20% of the S&P 500 market. These companies have benefited from the Coronavirus and investor optimism will remain strong until they have reported. Unfortunately, these tech giants are not representative of the broad market and the vast majority of companies are struggling. Swing traders should almost be in a cash position at this stage. For the last week I've been encouraging you to reduce your risk exposure. We are selling out of the money bullish put spreads on stocks that have a tendency to rally into the earnings announcement. These trades will expire a week from today. This strategy allows us to take advantage of a statistical edge created by historical price movement. The trades are very short-term in nature and we will capitalize on accelerated time premium decay. This will allow us to reevaluate market conditions on an ongoing basis. We want to be in cash in August. Instead of managing losing positions, we will be looking for opportunities when the market drops. If by chance the market treads water, we will have additional information and we will be able to reevaluate. At best, the market remains flat and stocks gradually grow into their current valuations the rest of the year. At worst, we get a market correction and valuations returned to normal levels. In either case the likelihood of a sustained market rally is low. Day traders should be cautious on the open. Gaps higher have been difficult to trade. Let the early action settle in and look for opportunities to trade relative strength. This is a low probability trading environment so keep your size small and your trade count low. If the market can rally above SPY $323 we might have some excellent option lottery plays late in the day. Support is at SPY $319 and resistance is at $323. The primary message is for swing traders to progressively get into a cash position. . .
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