May 22, 2020
Posted 9:30 AM ET - PRE-OPEN MARKET COMMENTS FRIDAY - The S&P 500 started off with a bang this week. Stocks rallied and the index raced to the top of its range. The 100-day and 200-day moving averages are within striking distance and they are providing resistance. Excitement over the global economic reopening is fueling optimism and central banks have the printing presses running full out. I expected a test of SPY $297 this week and that could still happen. Tensions between the US and China are flaring up, but we've been here before. China has stated that it plans to continue with the Phase 1 trade deal with the US. China is increasing its political pressure on Hong Kong and we could see new protests there. Retailers are posting mixed results. Those who were deemed essential areknocking the cover off the ball and the rest are struggling. Asset Managers are ready to buy stocks if they see any signs that the recovery is gaining traction. They know that quantitative easing and fiscal stimulus will be used if needed and this is providing a safety net for the market. Bond yields are at historic lows and they don't keep pace with inflation (negative real returns). Investors are forced to own equities to generate a reasonable rate of return. Consumer spending will determine how quickly the market moves higher. If workers feel that their jobs are secure, they will spend. We won't have this piece of the puzzle for another month. Swing traders should focus on selling out of the money bullish put spreads on strong stocks. This strategy will generate income while we wait for clarity and we can distance ourselves from the action. Option implied volatilities are still elevated and this strategy capitalizes on a decline in Vega and Theta (time decay). I view this as a low probability swing trading environment and we need to be patient. Day traders should keep their trade count and size to a minimum. The market showed some weakness yesterday and I don't believe we will have a meaningful rally until the downside is tested today. Once support is established, look for stocks with relative strength. I believe that an early rally this morning will be our best window of opportunity to make money. The market should be able to rally into the weekend and I am expecting it to close above the 100-day MA today. I won't be trading the afternoon session. Trading volume will drop off and Tuesday is likely to be a slow day as well. Look for the bid to be tested this morning and for a possible rally late in the day. A close above SPY $297 would be bullish. Support is at $292 and $294. Resistance is at $296.40 and $299.50. Please take a moment this weekend to remember the men and women who proudly gave their lives protecting freedom for our great nation and for people around the world. Happy Memorial Day! . .
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