Trump Wants A Healthcare Bill – This Will Delay Tax Cuts – Bearish
Yesterday the S&P 500 sold off 20 points on the open. Our market rating had very negative reading on Monday and it was correct. Stocks sold off sharply and they spent the rest of the day recovering. The bounce was nice but it still feels like there is some selling pressure that needs to be worked off. Stocks will be choppy the rest of the week and trading volume will decline.
Janet Yellen’s comments on Monday seemed hawkish. The Fed sees improving economic conditions and they plan to tighten. Investors are nervous that the Fed is moving too quickly. They hiked rates twice in the last four months and last week’s dismal jobs report is raising concerns. ISM services also came in a little light last week.
There is some overnight news that I consider to be bearish. Trump still wants to focus on the healthcare bill. If passed it will save billions of dollars and it will help pay for the proposed tax cuts. This change means that tax reform is on the back burner and it’s really all the market cares about. The healthcare bill will take many months to approve and investors will grow impatient. I consider this to be a major development and it will weigh on the market.
Earnings season is about to start and major banks will report tomorrow (Wells Fargo, Citigroup and J.P. Morgan Chase). I believe these stocks have plenty of upside and most of them have pulled back to major support levels. The market will not rally without the financial sector.
There were rumors yesterday that China is moving troops to the North Korea border. The Chinese government denies these reports. If it were true, they would have no reason to deny this – it would be a sign of good faith in US relations. This would have been bullish because it would put pressure on North Korea.
Swing traders should keep their powder dry. We got a nice little dip yesterday, but I still feel there is more work to do on the downside. If the market drops again and it finds instant support we can start selling out of the money bullish put spreads. We want to take advantage of time decay and the probability of a market decline during earnings season a small.
Day traders should trim their size and activity. Trading volumes will decline into the holiday weekend. I am going to favor the short side this morning. As the day unfolds my activity will decrease. Use the first hour range as your guide. If the market makes a new low for the day after two hours of trading we are likely to see sustained selling. I’m still expecting a more orderly decline and we might get it today.
Support is at SPY $234.70 and $231.50. Resistance is at $236.50.
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