Posted 10:30 AM ET – Yesterday, the SPY was within one dollar of the all-time high. Stocks shrugged off weak economic news from China and the huge vote in Crimea this Sunday. The early optimism faded quickly and we witnessed a massive reversal. The selling pressure was steady and it should continue today.
The market will try to recover this morning and Asset Managers will gauge the size of the offers. If they sense a great deal of selling pressure, they will pull their bids. We are in “risk off” mode.
Once the early buying subsides, the selling pressure will increase. There are still many bullish speculators that need to get flushed out.
I don’t believe Crimea is the issue. Our greatest weapon is the financial markets. Russia is taking a beating. Their stock market has fallen to levels not seen since 2009 and yields are up above 9%. The ruble is getting crushed and analysts believe they could see capital outflows in excess of $50 billion per quarter. The price for an annexation of Crimea will be high and Putin will have to soften his tone. Consequently, we could see a small relief rally on Monday.
China is the dark cloud. Economic conditions are slipping and the PBOC is content with current conditions. In the last few weeks we have seen an investment trust default and a corporate bond default. These are insignificant if they are isolated events. That is the key.
If we start to hear that other investment trusts are failing, it will bring the entire shadow banking system into question. These are unregulated institutions and many believe that they are extremely leveraged. There was a great 60 Minutes special on the housing bubble in China a few months ago. There were entire cities of empty high-rises.
I don’t want to pick the top of the market after a five-year bull run. However, I believe there is a nice shorting opportunity that is setting up. It’s not wise to trade against a long-term uptrend so keep your size small.
This is the second wave of selling that we’ve seen this year and it has more room to run. If support at SPY $185 fails, buy puts. This breach will flush bullish speculators out of their positions. Use that level as a stop and manage your risk.
I don’t believe the second shoe will drop for another week. China will post its flash PMI on Monday, March 24th. That could be the event to watch. As economic conditions continue to slip, weak lenders will start to crumble.
It is impossible to time a financial crisis. However, we can gauge fear. When stocks react negatively to the news, we need to respect the move. Technicals will tell us when to get short.
I am long puts and I will add if the SPY breaks below $185. As long as we close below $185 I am comfortable holding the position over the weekend. I know that I might have to take a little heat if there is a relief rally.
As the week progresses, the FOMC and the upcoming flash PMI’s will weigh on the market.
Domestic economic news has been good. That will counter any major selling. We are in for a choppy week.
It will not be easy to stay short, so keep your size small.
I’ve been mentioning all week that this is a low probability trading environment. The selling pressure is fairly heavy and Asset Managers will not chase at this level. That means we have a nice little shorting opportunity.
If this is a market top, we can’t get aggressive until major support levels have been tested and they fail.
Exit any long positions now. Get short below SPY $185 and be prudent.