Market Dip Is Coming – Stay In Cash and Be Ready To Sell Bull Put Spreads

Posted 9:00 AM ET - Last Friday the market staged a stealthy rally and the S&P 500 closed on its all-time high. The action was dull early in the day but stocks inched higher on light volume. A better-than-expected employment report strengthened attracted buyers. Earnings season climaxed and the news will start to dry up this week. Trading volumes will decline and without a catalyst it will be tough for the market to advance. Any breakout will need help from financials and energy. Both sectors saw a little buying on Friday. Oil breached horizontal support last week and it hit a six-month low. We might have seen the heaviest selling and energy stocks are due for a bounce. The long-term fundamentals are still weak so don't overstay your welcome. I like selling out of the money bullish put spreads on these stocks. Trump plans to reduce bank regulations and that could be a catalyst for this sector. The healthcare bill is in the Senate and it will be volleyed back and forth with the House this summer. Investors will grow impatient if this process drags on. Tax reform is the key to the next leg of this rally. The economic news has been solid, but not robust. Ideally we will consistently see job growth above 250,000 and Q2 GDP above 2.5%. We also want to see improving activity in China and Europe. The Fed is focused on future economic growth. They believe that seasonal weakness has run its course and that tells me they are prepared to hike in June. Good news is priced in and I believe the market will dip in the next few weeks. There are a couple of gaps that need to be filled in and a quick 50 point S&P 500 retracement would do that. Swing traders need to patiently wait for that decline. That will be a window of opportunity to sell out of the money bullish put spreads. This strategy allows us to distance ourselves from the action and we can take advantage of time decay. The summer months will be spent evaluating economic strength after a third rate hike in six months. Investors will also be gauging progress in DC. We should see a few nice moves within a 50 point range this summer. Day traders should let the early selling run its course today. The market inched higher on light volume and once the momentum was established sellers pulled their offers. The gains from Friday will be given back and we will see if buyers are still engaged. Take your lead from energy and financials. If these sectors are moving higher the market will rally. We can expect to see some rotation out of tech. Retailers are on deck and they might see some buying ahead of earnings announcements. I have been finding nice opportunities after 90 minutes of trading. Waiting gives me a chance to get a feel for the market and to identify stocks with relative strength. When the market does not have a trend I avoid trading early in the day. Stocks will try to tread water near the all-time high this week. I am expecting a pullback this month so i will be watching for late day selling. Support is at SPY $238 and resistance is at the all-time high. . .

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