February 5, 2019
Posted 9:30 AM ET - Yesterday the S&P 500 broke through the 100-day moving average. That was a major technical level and momentum favors the upside. Mega cap tech stocks have reported earnings and sellers will get more aggressive. Good news is priced in and any surprise favors the downside. If the 100-day moving average is breached we will take a short position. Google posted results after the close and the stock is down almost 2%. By the end of the week most of the major earnings will be known. At a forward P/E of 16 stocks are reasonably priced. EPS are up 18% so far (Y/Y) and that is strong by historical measures. Trade talks with China are progressing and I like that the next meeting was scheduled immediately (10 days from now). That is a positive sign, but the negotiations will take months. The market will get anxious and the deadline (March 1) will be extended. In the meantime, China's economic growth will continue to slip. The Fed will decelerate its balance sheet reduction, but we don't know to what extent. They still project two rate hikes this year and investors are pricing in no rate hikes for 2019. Consequently, there is a bearish surprise component. The Fed wants to raise rates and they want to reduce the balance sheet. As the market moves higher they will get more hawkish. Theresa May plans to have a new proposal from the EU within a week. That new proposal will be voted on by Parliament and the country will not extend its Brexit deadline. The Irish border is a "sticky point" and the EU might not be accommodative. We will know in a week. If there is no deal the exit will be ugly. Domestic economic conditions are robust. Job growth is very strong and ISM manufacturing was solid last week. ISM services will be posted 30 minutes after the open today. International economic growth is the concern. Europe, Japan and China are slipping. Trade deals will keep economic growth from falling off a cliff, but they won't stop the trend. Tonight President Trump will address the nation. He will stress the importance of border security and he will insist that funding for the wall be included in the continuing resolution. If it isn't, he will veto the bill and we will have another government shutdown. He could declare a national emergency or he could reallocate unused (but appropriated) funds from other areas. The wall has turned into a partisan issue. Republicans want a secure border and Democrats want open borders. This battle will play out in the 2020 presidential election. Swing traders should short the SPY if it trades below $270. Use a stop of $272 on a closing basis. I'm not projecting a major market decline today; I just want to have instructions in place. A negative news event could strike at any time. A government shutdown, a breakdown in Chinese trade negotiations, reluctance by the EU to work on a new Brexit plan or dismal economic numbers from Europe or Asia could spark selling. Market declines like we saw at the end of 2018 do not repair themselves quickly. We will see an aftershock in the next two months. Day traders should use the 100-day MA as a guide. As long as we are above it, focus on the long side. Buyers are tenuous and the trading volume is light. Before the market moves higher, it tests the downside. Be patient and make sure that the bid is still there. Once stocks start grinding higher, look for relative strength. If we are above the first hour high you can get more aggressive with your long positions. I thought that we might test the 100-day MA and I expected market strength to last through the middle of this week. Now I expect to see some signs of exhaustion. . .
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