The backdrop is bearish this morning. Favor the down trend and look for shorts.
PRE-OPEN MARKET COMMENTS THURSDAY – The selling pressure that started with last Friday’s Fed speak in Jackson Hole is gaining traction. The S&P 500 has broken the 100-day MA and the 50-day MA in the last week and the futures contract is down 30 points before the open. Global markets were down on negative economic releases and this is likely to be another soft day as we prepare for the Unemployment Report tomorrow.
The Fed is going to tighten even if it means that the economy weakens. In fact they are expecting that to happen. This was the message from Powell last Friday. Inflation is still running how around the globe and they are determined to tame it. The Fed is also accelerating quantitative tightening (QT) and that will have an impact. Next week the ECB is likely to raise rates 75 basis points. This is a big deal for them since they have been reluctant to tighten because of weak economic conditions.
It is the end of the month so there were many overnight economic releases. In general, the PMIs were weak. China fell back into contraction territory and they have new Covid-19 shut downs. As you know from my comments, China is my greatest market concern.
Initial jobless claims have been holding steady and that bodes well for tomorrow’s jobs report. Analysts are expecting 300K new jobs. The Fed is going to tighten even if they see a weak number, so bad news is bad news. I do NOT feel the jobs report is going to be weak so I am not going to position myself for it. I do feel that surprise favors the downside. If hourly wages come in at .6% or higher, that will spark selling. ISM manufacturing will be released after the open.
My daily market comments for swing traders are intended for a 3-4 week window. We have been expecting a pullback, but we did not know how deep it would be or how long it would last. The 10% drop in the last week tells me we could be sidelined at least until the FOMC statement in September.
Day traders – our best scenario is a gradual drift higher on mixed candles. 1OP will start the day in a deep trough and this bullish cycle will be a good “tell”. If the market can’t fill the gap, we will know the selling pressure is heavy and that bounce will stall. That will give us a great entry for shorts. Overseas markets were weak and that will provide a stiff headwind. A gradual drift lower during a bullish cycle would also be bearish, but I would not jump on it for the first 30 minutes. Given the downward momentum in the last week, you should keep your longs to a minimum. Yes, there are a handful of stocks that buck the trend each day, but they had better be special and they had better have extremely heavy volume. Until I see an air pocket that reverses with 3 or more consecutive stacked green candles on heavy volume, I will view the bounces as short covering rallies that will eventually reverse.
WE ARE IN PRE-HOLIDAY TRADING AHEAD OF A BIG RELEASE! Be careful.
Support is at SPY $390 and resistance is at the 50-day MA.