Passively Bearish – Economic News Will Not Spark Fear Of A Rate Hike

Posted 9:45 AM ET - Last Friday the market started to show signs of weakness. The SPY breached horizontal support at $207 and it tested $205 before buyers stepped in. We saw a late rally and there is follow-through buying this morning. Mega cap tech stocks have reported and they did not spark excitement. Microsoft, Intel, Netflix, Apple and Google disappointed. Amazon and Facebook were the only bright spots. These stocks have led the rally the last few years and they've lost their leadership. Basic materials and industrials have led the rally. Global economic activity is sluggish at best and the fundamentals don't support current price levels. As I look across the different sectors, I don't see a catalyst to push the market closer to the all-time high. The FOMC statement was a little more hawkish. Global risks have subsided and the Fed will start prepping the market for the next rate hike. I don't believe we will see one before the election, but the rhetoric will weigh on the market. Central banks (ECB, BOJ and PBOC) are satisfied with current policy and they are not inclined to ease at this time. This market rally has been sparked by money printing and that catalyst is gone. There are a few nagging events in June (Brexit, Greek debt negotiations and GOP convention). Credit issues in Brazil and Portugal could also surface. I am passively bearish. The price action will be choppy and it will have a downward bias the next few weeks. The SPY could test $200 - $202. After that, the market will fall into a trading range and the summer doldrums will set in. A substantial decline is possible in August/September and we could test the low of the year at that time. Last Thursday I bought VXX and I sold it Friday morning for a nice profit when the market tanked. Overnight positions might be limited to one or two days and we are not seeing much follow-through. Many markets are closed today and the action will be subdued. ISM manufacturing, ISM services, ADP and the Unemployment Report will keep traders engaged the remainder of the week. Earnings releases are still brisk and there will be opportunities. I like selling out of the money call credit spreads on stocks that have rolled over and that have breached horizontal support. I am not committing a lot of capital to this options strategy because option implied volatilities are very low and I'm not adequately rewarded for the risk. Day trading continues to be my bread and butter. If I see late day selling, I will consider bearish overnight positions. The market will try to get above $207 today. There should resistance at that level and I will be looking to short the opening move. After the first hour, I will use that range as my guide. If we are above the first hour high I will focus on longs. If we are below the first hour low, I will focus on shorts. The economic releases this week will show sluggish growth. They won't be “hot” enough to spark fear of a rate hike. Stocks will struggle to move higher and resistance will build. . .

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