May 13, 2020
Posted 9:30 AM ET - Yesterday the market opened at a post-crash high and it immediately backed off. A tight trading range during the day eventually caved in to selling pressure. Fears of a second wave of Coronavirus infections pushed the SPY below support at $288. China, South Korea and Germany are seeing a rise in new cases and daily deaths in the United States remain above 1500. The world is trying to reopen and the tone is very somber. Any hint of a sluggish reopening will lead to a market decline. Asset Managers are erroring on the side of being long. Interest rates are at historic lows and yields don't keep pace with inflation (negative real returns). Central-bank money printing is providing a safety net and that is helping the market tread water. Corporations are raising cash through bond offerings and the government is buying ETF's that invest in corporate debt. This cash flow will help companies shoulder the liquidity crunch caused by the shutdown. Corporations are saving cash by cutting dividends and by scrapping stock buyback programs. This will soften the market bid. The PPP stimulus plan will provide temporary job security for the next 6 to 8 weeks. Workers will be looking over their shoulder and they will wonder if they will be laid off after the stimulus money runs out. Consumers will be cautious and spending will contract. We are halfway through the month and we needed an immediate reopening and economic energy to avoid credit issues. That's simply not happening and the phased reopening is going to take much longer than expected. The $6 trillion stimulus money will quickly run out and this will become more apparent with each passing week. Boeing reported zero new plane orders for the month of April (the second time this year). The CEO said that a major carrier is likely to fail in 2020 and that air travel would be lucky to recover to half of its normal level this year. Auto sales are expected to decline 27% in 2020, auto rental agency Hertz is filing for bankruptcy and car dealers are sitting on a glut of inventory. Many restaurants are choosing not to reopen during the phased reopening because they can't make money with the social distancing requirements. Banks are taking huge bad debt write-downs and zero interest rate policies will make it very difficult for them to make money. These are just a few examples of the challenges faced by companies. Swing traders should be very cautious. We have very little exposure in our portfolio. Our bullish put spreads and naked put writes are way out of the money and they will expire this week. Buy them back for pennies and reduce risk. Last week we bought two longer-term bearish put spreads and they are likely to start kicking in soon when the market rolls over. This is a stock pickers market and I plan to focus on selling out of the money bearish call spreads in my Weekly Swing Trading video tonight. The market drop yesterday is a reminder that sellers are close at hand. Resistance is building and the market has not been able to advance in the last month. Asset Managers are waiting to see how the reopening plays out. If they don't see steady improvement, they will get nervous. Day traders need to be cautious on the open. After late day selling yesterday I don't believe that we will see a decent rally until the downside has been tested. The SPY will challenge $288 this morning and that is an important level. I am still seeing better price action on the upside. The strength has been contained to technology and biotech. Fortunately, we have been able to make great money even in a sideways market because we are finding the right stocks. Option Stalker searches find relative strength and relative weakness. Each day I am evaluating the 1OP indicator and it tells us which side of the market to favor. Wait for the 1OP signals and trade stocks with relative strength when a market pullback is reversing. Depending on the selling pressure today, we may be looking for shorts as well. I've had less success on the short side, but that could change if the market momentum shifts to bearish. The S&P 500 is trapped in a trading range and we are seeing two-sided action. This will continue for the next few weeks while Asset Managers monitor the recovery and consumer confidence. I am bearish, but I am not going to short the market until I have evidence of a technical breakdown. Late day selling and follow through selling the next day would be a warning sign. Let’s see if that happens today. Support is at $288, $285 and $280.Resistance is at $290, $294 and $300. . .
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