Brace yourself for action. This is going to be a busy week for economic releases and the focus will shift away from earnings.
This morning, ADP reported that private sector job growth increased by 200,000 in July. That was much better than expected and it might confirm tapering in September. The FOMC will release its statement this afternoon and there is a chance for a negative reaction.
Chicago PMI came in a little better than expected and Q3 GDP (advanced) came in better-than-expected (1.7%). The calculations for GDP were adjusted and traders are still sifting through the release. There were a couple of interesting components. First of all, Q2 GDP was revised down to 1%. Second of all, Q3 GDP showed that government spending cuts were negligible. This could mean that the sequester had a smaller effect than forecasted or it could mean that it has not filtered through the economy yet.
The market has rallied on very light volume and earnings were not a catalyst. Revenues for the S&P 500 will increase 1.1% and profits will decline .6% year-over-year. These are some of the worst comps we’ve seen in many years.
Asset Managers will not chase stocks at an all-time high when economic conditions are sluggish. Global growth is uncertain and interest rates are on the rise. Corporations have not provided much clarity and guidance is cautious.
The bid will weaken and we should see a round of profit taking. Bullish speculators will get flushed out and the market should retrace back to the middle of the trading range (SPY $163).
I am trading a mix of calls and puts after earnings releases. I am looking for breakouts/breakdowns and this balance hedges my overnight risk. I will get more aggressive if I see late day selling and follow-through the next day. When I see that, I will shift to a bearish bias. If the SPY closes below $167, I will add to put positions.
The market is “dead till the Fed”. The price action will be choppy and we are likely to get busy into the close.
I expect to see profit taking, but I’m not going to jump the gun. Every decline has rebounded in the last week. I need to see selling late in the day and I need to see follow-through the next morning. Until then, I will maintain a balanced approach.
My positions will have a slightly negative (3:2 bearish to bullish) bias into the FOMC statement today.