Market Will Stabilize As Earnings Crank Up
Last week the market showed some signs of strain. I thought the downside might be tested and I mentioned it earlier in the week. The SPY closed below the 50-day moving average and a wedge pattern was breached. Volume was moderate and this move needs to be respected.
Earnings season typically attracts buyers. J.P. Morgan Chase, Citigroup and Wells Fargo reported last Friday. Financial stocks have been drifting lower and they were on major support levels before the announcements. They have plenty of upside and a bounce would have set a bullish tone for the upcoming week. Banks sold off last Friday and the market is not going to get any help from this sector. The earnings were pretty good and all three banks beat to the upside.
Mega cap tech stocks should fare better. Earnings will crank up this week and I’m expecting market support.
Economic data points have been soft (Unemployment Report and ISM services). I don’t trust the jobs report is much as I do the strong ADP number (293,000 new jobs). ISM services pulled back from a lofty level that is hard to maintain (57). Investors were spooked by these numbers but I believe that economic growth is still intact.
China posted stronger than expected industrial production, retail sales and GDP. Their economy is on sound footing and buyers are nibbling this morning.
From a geopolitical standpoint Trump had a good week – domestic policies are the issue. He said that he still wants to get a healthcare plan approved before he tackles tax reform. This was the most bearish news event last week. Healthcare will take the rest of the year to hash out and it means that tax cuts will have to wait. The market only cares about tax cuts and investors are impatient.
The Fed has an aggressive tightening agenda. They will continue to raise rates this year. The market needs strong economic growth if it is going to shoulder future rate hikes. Any dip in economic activity will prompt profit-taking just as we saw last week.
Swing traders should start looking for strong stocks. This wave of selling will find support and I like selling out of the money bullish put spreads. It is rare to see a market decline during earnings season. This strategy allows you to distance yourself from the action and you can take advantage of time decay for the next few weeks.
Day traders need to remain flexible today. The early rally needs to hold and we need to see a grind higher. If the gains vaporized quickly the downside will be tested. I plan to watch the price action during the first hour and I will use that range as my guide. If we are below it I will favor the short side and we are above it I will favor the long side.
I believe that the selling last Friday was a little over-extended. Traders did not want to go home long into a three-day weekend when the price action has been soft. Prices should firm up this week. Support is at the 100-day moving average and resistance is at the 50 day moving average. The market will test the downside this week and support will be established. After that we should see a small bounce.
Towards the back half of earnings season it is very possible that we will see a 10% correction. Sluggish economic growth, an aggressive Fed and tax cut delays could prompt profit-taking.
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