October 8, 2018
Posted 9:30 AM ET - Last week stocks took a breather and the SPY tested horizontal support at $287. Weakness overseas will weigh on the market this morning and that support level will be tested again. Bullish sentiment was very high and speculators are getting flushed out. This is the drop had been waiting for and once support is established we will have a fantastic buying opportunity. A trade war with China is likely. Neither side wants to negotiate. Mike Pompeo's trip to China did not go well. Iranian sanctions won't be as effective without China they account for 25% of Iran's oil exports. China is not likely to curb purchases given the current environment. The PBOC reduced reserve requirements and that was largely expected. Chinese stocks were down 4% overnight. India committed to buying 9 million barrels of oil from Iran. If customers ignore US sanctions it might keep Iran from shutting down the Strait of Hormuz. Brazil looks like they will elect a right-wing candidate. Their market rallied on the new, but their economy is in a nasty recession. Italy is moving forward with its proposed budget. The deficits are much bigger than the EU would like and Italian bond yields are climbing. Banks are closed for holiday (Columbus Day) so trading volume will be relatively light. Bonds have broken major horizontal support and that is one of the reasons stocks have been dropping. Bond markets are closed today so we will get a little reprieve. Earnings season will start this week and J.P. Morgan Chase, Wells Fargo and PNC will report Friday. Banks have been weak and the market needs leadership from this sector. AAPL and AMZN have accounted for 30% of the gains in the S&P 500 this year. That is not a healthy sign and we need broad based participation. Domestic economic releases have been strong. ISM manufacturing, ISM services and ADP were excellent last week. The wage component of the Unemployment Report (.3% rise) was benign. Wage inflation could keep the Fed in tightening mode. You know from my comments during the last month that I have been skeptical. There were too many dark clouds for the market to liftoff and we had a tight intraday stop. Bullish speculators are getting flushed out. Swing traders should be in cash. We will wait for an air pocket and a big reversal - then we will buy. Day traders should look for opportunities on the short side today. Global weakness will weigh on the market and SPY $287 will be tested early. Use that as your guide. If we are below it you can get more aggressive with your shorts. I believe we will see profit-taking for a few more days. . .
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