New Market High Is Vulnerable – Expect Profit Taking Before June FOMC

Posted 9:00 AM ET - Yesterday the S&P 500 made a new all-time high on light volume. After the initial surge, stocks traded in a very narrow three-point range the rest of the day. The gains held despite a big drop in oil. I don't trust this rally and I believe we will see a round of profit-taking ahead of the June FOMC. Economic growth is moderating and current activity levels don't justify another rate hike. The Fed is likely to tighten in a few weeks. The recent market rally has provided a window of opportunity and they will take advantage of it. Every sluggish data point will take its toll on the market and investors will take money off the table. Politicians will take time off this summer and tax cuts will be delayed. A lack of action in DC will add to the selling pressure. The recent market rally has been narrowly confined to tech stocks. Global Asset Managers have been selling US equities (22 billion in outflows). I can't get behind this breakout until I see strength in financials. Swing traders should start buying back out of the money bullish put spreads next week. Time decay has whittled away at premiums and the recent market rally has also helped. Go to cash and wait for a market pullback. Day traders need to be careful today. Trading volume has been light and after the first hour of trading stocks will flat line. I plan to take the day off. If I find something interesting in the first two hours I might trade, but my size will be small and I won’t do more than a couple of trades. I will spend my day looking for swing trading opportunities on the short side. When we come back from holiday I plan to scale into put positions if the SPY closes below $240 and I want to be ready for action. In the event that the market grinds higher, I will stay sidelined. The last leg of this rally will be hard-fought and the downside risks outweigh the upside potential. Take time to honor those who have proudly served our great country. Happy Memorial Day! . .

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