Yesterday I was only interested in shorting the market. Black Friday retail sales dropped for the first time in four years and the news was discounted. The early rally failed and I was able to buy some puts. We should see follow-through selling today.
Asset Managers are not worried that they will miss a year-end rally after a 25% run this year. In fact, many might be taking profits ahead of the debt ceiling, the continuing resolution, tapering and Obamacare.
Bullish sentiment is high and speculators need to get flushed out. If Asset Managers sense profit taking, they will pull bids. Bullish speculators will hit the exits and we could see an air pocket.
This is a week filled with economic releases (PMI’s, ISM manufacturing, ISM services, ADP, GDP, the Beige Book and the Unemployment Report). The news should be consistent with moderate growth. The Fed will not taper until Janet Yellen takes office and the debt ceiling is extended.
Earnings season is winding down and the results have been decent. The dividend yield on the S&P 500 is still higher than the yield on US 10 -Year Treasuries. Corporate cash flows are at record levels and stocks are attractively valued.
I am not looking for a huge decline. Asset Managers will not chase stocks at an all-time high, but they will buy dips. This small wave of selling should run its course in a week. Once support is established the market should be able to drift higher on very light volume.
The market will probe for support early this morning. Buyers will nibble so that they can gauge the selling pressure. If we don’t bounce, the price action could get nasty. If we do bounce, we are still likely to see additional selling this afternoon.
First support is SPY $180 and we are testing that right out of the gate. If the market does decline we are likely to drift down to SPY $178.
I bought some puts yesterday and I will add to positions this morning if the early bounce fails. As long as the market stays below $180, I am comfortable being short. My position is relatively small.
If you are a swing trader, get out of long positions. This decline could be very swift and you need to be nimble. I suggest sitting this move out and waiting for support. If the market sells off, you should have a nice buying opportunity in a week or so. That rebound should grind higher into year-end and it will be a sustained move.
This rally is in the ninth inning. Keep your size small and be nimble.