Market Still Has Some Work To Do On the Downside. Retail Earnings Should Mimize the Damage Today

August 20, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

I will not be publishing market comments on Wednesday. Yesterday, the market tried to rally early in the day and it ran out of steam. Profit takers reduced risk and Asset Managers pulled bids. This is nothing more than normal consolidation and bullish speculators are being flushed out. I expect us to test the 100-day moving average before we find support.

The news this morning was relatively good. Bad news was priced in to retail earnings and the results were better than feared. If the early rally stalls, the downside will be tested. I feel that the damage will be contained today and we might actually hold this level.

The only significant news this week is the FOMC minutes Wednesday afternoon and flash PMI’s Thursday. This selloff has been all about tapering and the Fed minutes could spook investors. The market should find support Thursday morning when the flash PMI’s are released. China’s economic activity has been improving and Europe ticked into positive territory for the first time in many months.

Domestic economic releases have been good and initial jobless claims (four-week moving average) are at their lowest level is November 2007. As long as economic conditions continue to improve, the market will be able to stomach higher interest rates. US 10-year Treasuries are challenging 3% and they continue to climb. This is providing a stiff headwind for the time being.

Asset Managers won’t chase stocks at an all-time high, but they will buy dips. Politicians and traders are taking time off and the volume is very light. It will remain that way through Labor Day. Once the “smart money” returns, the bid will strengthen.

Seasonal weakness, the debt ceiling, the sales tax hike in Japan and tapering are weighing on the market. As we move into September, traders will try to scoop stocks before the year-end rally. Politicians (US and Japan) will kick the can down the road as they always do. Traders will embrace tapering as long as economic conditions continue to improve. Bottom line, these nagging issues will be resolved.

Year-over-year earnings growth has been flat, but cash flows are at record levels. Companies are using that money to buy back shares. Profit margins are robust due to cost-cutting and any uptick in demand will go right to the bottom line.

Day traders will still have opportunities to short this market. Look for stocks that have been in a downtrend and are breaking horizontal support. Be nimble and keep overnight risk to a minimum. One dovish comment from a central bank is all it will take spark a huge overnight rally.

Swing traders, take some time off. The next decent move will come on the rebound. We still have some work to do on the downside. I will be watching for an “air pocket” and a bounce off of the deep intraday low. I you want to know what this looks like, reference the SPY on June 24th. When I see that price action, I will buy with both hands.

Look for choppy action today. We will test the downside, but the damage will be relatively contained after a decent round of retail earnings. Sellers should be back tomorrow and we could see weakness after the FOMC minutes are released.
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