Sell Into Strength – Lock In Profits – China’s PMI/Bank Earnings Could Spell Trouble

Posted 9:40 AM ET - Yesterday, the market rallied on light post-holiday volume and it is likely to reach my second target of SPY $187.50 today. The overnight earnings news was good and the early price action suggests a rally this morning. Netflix posted solid results and high-flying tech stocks should catch a bid today. They have been badly beaten down and day traders can take advantage of dead cat bounces. I would not suggest taking longer-term positions in these stocks. The valuations are still lofty and if the market reverses, they will decline. Amgen and Gilead will post after the close. Good results could spark buying in the biotech sector. Companies that produce profits and have a strong pipeline will find support. The rest will be vulnerable and profit-taking will push them lower when the market rolls over. Flash PMI's will be released tonight and I will exit all of my call positions today. I feel the market has 2% upside and 15% or more downside. The risk/reward profile tells me to stay in cash until we see signs of selling. China's flash PMI will come in below 50. Activity continues to slow and fiscal stimulus won't have any impact for a couple of months. China's banks will start posting results on Thursday and loan defaults are on the rise. We've seen heavy selling near the all-time high and resistance is strong. The closer we get, the more likely we are to see an intraday reversal. Watch for a rally that quickly fails. Also watch for late day selling. If the market rolls over before it challenges the all-time high, it will be a sign that sellers are aggressive and the market is ready to roll over. Profits are expected to be flat year-over-year and stocks are trading at a fairly rich forward P/E of 16. Money has been rotating into bonds and that suggests a flight to safety. Raise your stop to SPY $186 and set targets on your call positions. Sell into strength today and lock-in profits. I still feel the next big move is down and I don't want to take my eye off the ball. When the selling does start, I don't want to be scrambling to get out of my long positions. I want to be totally focused on scaling into bearish positions. I will start buying puts when we breach SPY $186 and I will add below $184.50. I will also add when we break the 100-day moving average. If by chance I am completely wrong and the market makes a new high, I won't sweat it. I will remain in cash and I will evaluate the strength of the breakout. Look for a nice little rally today. Take some profits. . .

Daily Bulletin Continues...