Fed and PMI’s Will Keep A Lid On the Market Today. Day Trade and Wait For the News.

August 22, 2012

Yesterday, the backdrop changed slightly. Stocks marched higher early in the day and they reversed into the closing bell. The volume was light and there wasn’t much news to account for the move.

The momentum points higher and shorts are running scared. They fear that the EU might actually get ahead of the curve and they know it’s not wise to “fight the Fed”. At the first sign of economic weakness we could see another round of easing.

This lack of selling pressure has cleared the path for stocks. Trading volumes have fallen to levels not seen since 2007. In this “Christmas-like” environment, one news event could spark a substantial move in either direction.

Analysts downgraded Apple and the mega-cap stock weighed on the entire tech sector. After the close, Dell reported that revenues missed expectations. The guidance was also weak. Tablets and smart phones have reduced the demand for PCs and notebooks. After the close, Hewlett-Packard will release earnings and we can expect the same.

Toll Brothers was of greater interest to me. They said that this is the strongest demand they’ve seen in over five years. From 2001 through 2005, 50% of our employment gains were tied to the housing sector. We won’t have a sustained economic recovery without a rebound in home building. We are not out of the woods by any means, but this is an encouraging sign.

Exports in Japan declined 8.1% and that is a little concerning. Tomorrow, flash PMI’s will be released. Dismal news is expected and it could weigh on the market. However, buyers will return once support is established on the notion that central banks will ease. If activity is better than feared, the market will break out two new four year highs.

Greece will be asking for another handout from the troika. They are behind on fiscal spending cuts and revenues have declined substantially. This means they are not hitting their targets and the rhetoric will be heated. In the end, they will get their money.

The ECB’s plan to support short-term sovereign bond auctions has resonated with the market. European banks don’t want to buy this debt so the EU is forced to participate through the EFSF. This is not a solution, it is a Band-Aid. When yields start to rise we will be able to evaluate their fire-power. For now, credit concerns have subsided.

We’ve seen a little selling pressure and that will temper buying today. The flash PMI’s are the biggest news we’ve had in two weeks and traders will not add to long positions ahead of the news.

The FOMC minutes will be released this afternoon and they could weigh on the market slightly. The Fed is ready to take action, but current conditions don’t warrant QE3. The market is addicted to easy money and it would like to have that timetable moved forward.

Look for stocks to trade in a tight range. If we pull back on the PMI’s tomorrow, the selling should be brief and it will set up a very short-term buying opportunity.

Keep in mind that conditions are fragile and light volumes are sign that conviction levels are low.

My overnight risk exposure has been minimal and I won’t carry any overnights into the PMI’s. I will wait for the reaction tomorrow and after I evaluate the news before I take new positions. The market could swing in either direction.

I like day trading stocks that are breaking out above horizontal resistance after a period of consolidation. Look for those set ups in the Live Update table. EBAY is a good example of what I am looking for.
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