February 7, 2018
Posted 9:30 AM ET - The long-awaited 10% correction finally happened. Stocks were technically over-extended and bullish sentiment needed to be tamed. Program trading accelerated the drop and it will facilitate the snapback rally we are going to see. This is an excellent entry point and I would buy the dip this morning and use the 100-day moving average as your stop. The macro backdrop for the market is very bullish. We are in the beginning stages of an economic boom. Interest rates are low, credit concerns are very low and profits are rising. This is the "sweet spot". Fed officials only plan to hike three times this year. That is relatively dovish since some analysts were expecting four rate hikes. Fed officials said that just because inflation reached their target of 2% it doesn't mean that rate hikes will be ramped up. They also stated that domestic and global credit conditions are stable. Interest rates are near historic lows and they have lots of room to run before they impede economic growth. Corporate profits are robust and guidance has been excellent. At the lows yesterday the S&P 500 was trading at a forward P/E of 16. That is not excessive. Bullish sentiment was extremely high and those traders needed to be flushed out. Once that started to take place the momentum accelerated due to trading programs. They all start to feed on each other and that results in a deep drop. The good news is that they will also kick in on the upside. Swing traders should have two thirds of the position on now. In my comments yesterday the first entry was the 200-day moving average. The market never got that low so you were not able to enter at that point. The second entry was to buy at the open and the third was to buy when the SPY crossed the 100-day moving average. Both of those triggered. I suggest adding the third leg when the SPY trades above $269. Use the 100-day moving average on the SPY as your stop on a closing basis. Day trading is alive again. I love the intraday volatility. It's been a couple of years since we've seen price action like this. I still favor trading from the long side. Let the market come in this morning and wait for support. Once it is established look for stocks that have relative strength. I believe the market will start to settle down the next few days. Politicians are likely to extend the budget/debt ceiling and that will provide a relief rally. Stay long and look for opportunities to add. There will be some aftershocks for a few days so try to weather them. . .
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