Wait For This Round of Selling To Run Its Course. Buy the Dip Once Support Is Established

August 7, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market hit a small soft patch this week and I would not read too much into the decline. Volumes are extremely light and we were overdue for a pullback. The calendar is very light and this is nothing more than a small round of profit taking.

Global economic releases have been decent. China’s PMI came out better than expected last week and they will release CPI, trade balance and retail sales on Friday. Even if the number is a little soft, traders will take comfort knowing that the PBOC will provide a safety net. Europe’s PMI also came in better-than-expected last week and for the first time in many months it ticked into positive territory.

US economic releases have been good. GDP, ADP, Chicago PMI, ISM manufacturing and ISM services all exceeded estimates. Traders are growing accustomed to the fact that the Fed will taper. Monetary policy will remain accommodative even though bond purchases will decline.

S&P 500 earnings will decrease by .5% year-over-year. These are the worst comps we’ve seen in years, but Asset Managers are focusing on record cash flows and stock buybacks. Corporations are lean and mean and any uptick in demand will go straight to the bottom line.

Congress is in recess and the debt ceiling rhetoric will be subdued for a few weeks.

Asset Managers won’t chase stocks at an all-time high, but they will buy dips. The bid is strong and support at SPY $167 will hold. As long as it does, I will focus on bullish breakouts through horizontal resistance.

Look for companies that posted strong results and provided good guidance. These moves tend to last a few days and even if you get on the wrong side of the market, you will have time to get out without taking a beating.

We are headed for the summer doldrums. Keep your size small and wait for this small wave of selling to run its course. Line up your bullish picks and wait for support.
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