May 12, 2020
Posted 9:30 AM ET - The market is extremely resilient and it looks poised to challenge major resistance at SPY $300 in the next week. Asset Managers are erroring on the side of being long because global fixed income yields are producing negative real returns. Central-bank money printing and stimulus is providing a safety net and buyers will wait patiently to see if the plan works. Global economies are gradually reopening and consumer behavior will be monitored very closely. In the next six weeks we will have clarity and that is when we can take a more aggressive stance. The Fed will start buying corporate bond ETF's this week. Nothing like this is been tried before and corporations are rushing to sell debt so that they can raise cash and shoulder this liquidity crunch. Similar programs are being initiated by other central banks and the ECB is allowing financial institutions to pledge junk bonds as collateral. Central banks are engaged in cross currency swaps and they are guaranteeing one and other. They know that if one fails, they all fail and they don’t want the Coronavirus to turn into a "Black Swan" event. The PPP stimulus plan is providing loans to small and medium-size businesses so that they can rehire workers. This money will last a couple of months and we will see if the economic reopening can gain traction. Employees will be watching business activity and they will gauge their job security. Until they feel their jobs are secure, they will keep their spending to a minimum. The Coronavirus is very resilient and we are seeing new "hotspots" in Wuhan, South Korea and Germany. Local and federal officials are nervous and they want to avoid a relapse. They have to weigh the cost of human life against the cost of an economic collapse. Boeing predicts that a major airline will fail this year and that air travel may not get back to 50% by year end. Many restaurants are choosing not to reopen until the economy is humming again. These businesses can't make money when they are forced to operate at 30% of capacity. The people I've talked to are not in the mood to eat out with masks on their face. The tone is somber and I believe the economic recovery will take much longer than expected. Earnings reports are not providing any clarity since guidance is not being provided. Most CEOs agree that Q2 will be worse than Q1. Swing traders need to remain on the sidelines for now. On a stock-by-stock basis we will look for opportunities to sell out of the money bullish put spreads and bearish call spreads. We need to wait for clarity. The S&P 500 is right in the middle of its high and low for the year. Major resistance at the 3000 level could be tested in the next week. The upward momentum is gradual and gains from this point forward will be hard fought. We will wait for clarity in the next few weeks and I believe the next big move will be down. We won't get short until technical support is breached and I also want to see late day selling and follow through. I don't know how all this will play out and if the economic recovery is stronger-than-expected, I'm also prepared to trade from the long side if I see signs the consumer confidence is improving. Day traders should tread cautiously this morning. Gaps up have been more difficult to trade. Relative strength is harder to spot and we need a pullback so that we can find the best stocks. Wait for that support and use that opportunity to identify relative strength. If the market continues to grind higher from the open the price action will be very dull and my trading will be relatively passive. Yesterday, stocks gapped lower and relative strength was very easy to spot. These down opens have been excellent for trading and we can get more aggressive on these moves. The bid is still strong and the price action has been better on the long side. Tech stocks have been leading the charge. This is a time to throttle back risk and to patiently wait for clarity. The good news from an option trading perspective is that option implied volatilities are declining and that will provide us with possible buying opportunities in the next few weeks when the dust settles. This is a fairly light news week and the intraday price action could be fairly dull. Resistance is at $295 and $300. Support is at $290 and $285. . .
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