February 13, 2020
Posted 9:30 AM ET - The market bid this extremely strong and lofty stock valuations combined with the Coronavirus have not rattled investor spirits. This morning we learned that China greatly under reported the number of Coronavirus cases and that it might be spreading faster than expected. We don't fully know the economic impact of the virus and investors have largely been discounting the event. The S&P 500 is poised to open 20 points lower this morning. China reported nearly 10 times as many newly confirmed Corona cases Wednesday as they did Tuesday. A new diagnosis classification was adopted. Newly confirmed cases in Hubei province jumped to 15,000 Wednesday from 1600 a day earlier. Hong Kong schools will remain closed until at least March 16th due to concerns about the spread of the virus. This event was very untimely and it hit during the busiest economic time of the year (Chinese lunar New Year). The Coronavirus will have a global economic impact and it is likely to push Germany's already fragile growth into a recession according to Deutsche Bank. Germany's growth has been hovering around .1%. The Eurodollar fell to its weakest level since 2017 and it lost .4% overnight. Brexit is not helping and there are concerns about the financial health of Italy. This dark cloud has been looming for years. Credit concerns are the one thing that can lead to a sustained market decline. It's important that we watch credit defaults in China. Businesses are strapped for cash and they have requested $8 billion in loans. This seems like a very low number and like the spread of the virus, I believe this number is under-reported. Imagine how many US retailers would go out of business if the geographic areas of the country that account for 70% of GDP were shut down during the Christmas holiday. China's shadow banking industry (not regulated) is greater than $20 trillion. There are even some domestic concerns surfacing with our budget deficit increasing by 25% over the same period last year. Our national debt has reached $23.3 trillion. I'm not overly concerned with global credit, but I am ever watchful. Earnings season is winding down and the results have been good enough to keep the market afloat near its all-time high. Domestic economic conditions are strong and the releases this week are light. Jerome Powell has been testifying before Congress this week and the tone remains dovish. The Fed is keeping an eye on the economic impact of the Coronavirus and they will ease if needed. Swing traders should focus on selling out of the money bullish put spreads that have two weeks or less of life. We want to take advantage of accelerated time decay and we want to keep rolling these positions. By keeping the bullish put spreads inside of two weeks we have the opportunity to reevaluate the market and to adjust our allocation. Last night I posted my weekly swing trading video and I highlighted six bullish put spreads and two bearish call spreads. I would not rush out and sell new spreads until the market has a chance to settle down this morning. This is a great opportunity to monitor relative strength for the stocks that have been highlighted. As the market drops, look for stocks that are holding up well. That is a sign of relative strength and these will be your best prospects once the market regains its footing. Last week we exited our SPY position because I did not want to be aggressively long. Bullish put spreads are neutral to slightly bullish and they allow us to distance ourselves from the action. I still prefer this options trading strategy in this market environment. Support is at SPY $333. Bullish speculators were not flushed out during the last market drop and I still believe that they are vulnerable. Bullish sentiment is extremely high and option implied volatilities are extremely low. This is a dangerous combination and it suggests that any surprise favors the downside. Day traders should watch the early action. Consecutive long green candles stacking on top of each other or consecutive long red candles stacking below each other in the first 30 minutes of trading would indicate that we will have a trend day in that direction. If we see a mix of green and red candles in the first hour of trading, the market will chop around. In the last few weeks the dips have been very brief and gaps down have found support in the first hour of trading. After a big opening drop we can expect the low of the day to be challenged and then we could see a gradual grind higher the rest of the day with the gap filling. Based on recent price action, I believe this is the most likely scenario. If by chance the market makes a new low after two hours of trading, look for a steady drift lower. If the momentum starts to accelerate, sell programs could kick in and that would put additional pressure on bullish speculators. SPY $327.50 is a secondary support level. I still like selling out of the money bullish put spreads and I believe that the market will find support this morning. Watch SPY $333. If we hit that level today it will be a sign of heavy selling and there could be follow-through tomorrow. If we make a new low after two hours of trading today I suggest buying VXX to hedge your bullish put spreads. . .
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