Daily Commentary: 1Option

eOption1Option Commentary

FOMC Statement Could Spook Investors – Tech Stocks Are Vulnerable

Yesterday tech stocks continued to power higher in anticipation of a good number from Apple. That optimism will start to wane after Facebook announces after the close today. The QQQ has been making new all-time highs for over a week and it is strong relative to the SPY. Bullish speculators have piled into mega-cap tech stocks and they will be flushed out in the next week.

The S&P 500 has been treading water near the all-time high. It needs help from financials if it is going to challenge the high. Oil prices have been falling and the energy sector is a drag on the S&P 500. If these two sectors can’t pick up the slack from profit-taking in the tech sector, the market will decline. I’m not looking for a major selloff, but I do expect it to fill-in some of the recent gaps.

The FOMC statement has the potential to spark profit-taking. The Fed will acknowledge an economic soft patch, but they will keep a June rate hike on the table. This would be the third rate hike in six months and I believe it will happen. The recent market rally gives them a window of opportunity and they will take it.

ADP reported that 177,000 new jobs were created in the private sector during the month of April. That is in line with consensus estimates and we should see upward revisions to the March Unemployment Report on Friday. The ADP report today was decent, but not robust. China’s PMI’s, US Q1 GDP and ISM manufacturing all came in light this week. After the open ISM services will be posted. Economic data points need to be strong if the market is going to shoulder another rate hike. Activity seems to have hit a snag.

Tax reform is all the market cares about. Last week we learned the details of Trump’s plan and the market rejoiced. Unfortunately, the chance of getting anything passed in the next few months is slim. Healthcare reform is a prerequisite and it looks like the modified plan will have difficulty getting through the House. It doesn’t stand a chance in the Senate. As time drags on, investors will grow impatient.

Mega cap tech stocks will be done reporting after the close today and we could see profit-taking. The Fed is prepared to hike and investors will grow impatient waiting for tax reform. These events will put pressure on the market.

Swing traders should buy back all of their bullish put spreads before the FOMC today. We entered these trades before the rally and the profits have maxed out. Reel them in and reduce risk. The next course of action is to wait for a market pullback and to reload. The QQQ has staged a major breakout from a compression and I don’t suggest selling out of the money call credit spreads on tech stocks with the notion that they are going to dramatically pullback. This is a dangerous strategy and it should only be considered by seasoned traders. These positions have to be monitored very closely. The best strategy is to wait for a market pullback and to sell bullish put spreads on the stocks.

Day traders should prepare for a quick pullback. Tech should show some signs of strain in the next few days and I plan on trading from the short side. Many of the stocks are in long-term uptrends and they are over-extended. Bullish speculators will get flushed out and there will be some nice day trading opportunities.

If the FOMC reaction is bullish and the market makes a new all-time high, I will trade from the long side. This scenario is unlikely. If the FOMC reaction is negative I will trade from the short side when the SPY is below $238. The next support level below that is $236.50 and we could easily take that out.

We will be “dead till the Fed” so keep your size small this morning. By all means take profits on long positions before the announcement. Energy and financials are the key to a sustained rally so watch those two sectors.


Market commentary provided by OneOption, LLC a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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