Here’s the Most Bullish Scenario – Wait For Clarity Thursday

November 5, 2018
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - A week ago the bottom fell out of the market and a support level was established at SPY $262.30. Stocks bounced off of that low, but we are not off to the races. Soft guidance from Apple cast a shadow over the market Friday. Job growth is strong and domestic economic data points are solid. The elections this week and the FOMC statement will determine market direction for the final months of 2018. Look for choppy trading the next two days. Earnings season is winding down and the results for Q3 have been good. The S&P 500 is trading at a reasonable forward P/E of 15. Stocks benefited from tax cuts a year ago and Q4 will be up against tough comps. Domestic economic growth is strong, but the rest of the world is struggling. Europe posted Q3 GDP of .4% and China had its lowest PMI reading of the year. Trump has been trying to prop up the market by saying that a great deal with China will happen. He is trying to calm the market ahead of the elections, but we are no closer to a Chinese trade deal than we were six months ago. Trump feels that China has taken advantage of us for decades and he will tighten the thumbscrews after the elections. I don't believe we will have a trade deal until China shows serious strains in their economic growth. Europe is still trying to forge a Brexit deal and they will not worry about the US until Trump puts their feet to the fire. The Fed has been very hawkish and traders are hoping for a softer tone this week. If the December rate hike is postponed, a nice rally will ensue. If the Fed tightens in December we will not have much of a year-end rally and we could even finish on a sour note. The FOMC statement will be released Thursday. The best case scenario for the market this week is a big GOP victory in the House and the Senate combined with dovish Fed remarks. A neutral scenario for the market (likely) would be Republicans controlling the Senate and Democrats winning the House. Balanced Fed remarks would also be needed. The worst-case scenario is that Democrats control Congress and the Fed maintains its hawkish tone. The 2016 polls got it all wrong so in my opinion anything can happen this week. Swing traders should remain in cash until we have clarity. I also like selling out of the money put spreads. Day traders should look for opportunities on both sides of the market today. Conditions will be choppy and you can use the first hour range as your guide. I am going to keep my size small and my trade count fairly low. We will see lots of position squaring ahead of major news so expect whippy price action. After this week we should have a clear sense of direction and option implied volatilites will drop to reasonable levels. . . image

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