Trouble Ahead – Stay In Cash and Wait For A Market Dip

Posted 9:10 AM ET - Yesterday the market was flat and the volume was low. The air has been “let out of the balloon” and we are heading into a news vacuum. Mega cap tech stocks have reported, major economic releases are behind us and we've heard from the Fed. Stocks are treading water near their all-time high and I sense a speed bump ahead. Equity funds have seen their largest withdrawal in years according to a Bank of America survey of Global Asset Managers. US allocation hit a nine year low in April and outflows totaled $22.2B. Furthermore, the recent rally has been narrowly confined to tech stocks. Without financials and energy this rally lacks punch. Profit-taking will set in as the June FOMC meeting approaches. I believe a rate hike is very likely and economic conditions are not strong enough to shoulder the third rate increase in six months. The next big economic news will come Monday. China will post industrial production, retail sales and GDP. Their numbers have been a little soft recently. Earnings season is winding down. Profits and guidance have been good. The strongest companies announce early in the cycle and the market no longer has that catalyst. Good news is priced in and investors will grow impatient as the healthcare bill stalls in Congress. Tax reform won't happen without it and that is all the market cares about. I'm not looking for a massive decline, but I believe a 50 point S&P 500 retracement is likely. That will fill-in the gaps that we've seen in recent weeks. Swing traders should remain on the sidelines until we get that pullback. It will present us with an opportunity to sell out of the money bullish put spreads. There is one exception. I believe selling out of the money bullish put spreads on energy stocks is a viable strategy right now. Oil should find support at this level. This options trading strategy allows you to distance yourself from the action and to take advantage of time decay. Day traders need to be patient during the first hour of trading. Let the market settle in and get a feel for the price action. If energy and financials stocks are moving higher the market will rally. Without help from these two sectors we are likely to see choppy price action with a downward bias. I prefer trading from the long side after an early pullback. The bid is still intact. Tech stocks are still strong relative to other sectors. Support is at SPY $239 and we are right on resistance at the all-time high. The market could poke through on very light volume. If it does I will day trade from the long side and I will be flat overnight. Watch for late day selling. That will be the first sign that the market is out of gas. . .

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