Market Dip Ahead – News Will Slow Down Next Week – No Catalyst
The S&P 500 is compressing near the all-time high. If this were a stock I would buy the breakout. Unfortunately it’s not. If you look back over time you’ll notice that every SPY gap fills in pretty quickly. That’s because it is a diversified index of 500 companies. Individual stocks can have company specific news that fuels the breakout and these gaps often take more time to “backfill”. Consequently, I believe the market will pullback in the next few weeks.
Earnings season climaxed this week. The news was good and so was the guidance. Now the focus will shift back to politics, economic growth and the Fed.
Trump scored a victory when the House approved a new healthcare bill. This is a feel-good moment for Republicans, but it will be shot down in the Senate. We won’t get tax reform until the healthcare bill is passed and investors will grow impatient.
Economic growth has stumbled recently, but it should get back on track. ADP said that 177,000 new jobs were created in the private sector during the month of April and that was a good number. This morning the jobs report came in at 211,000 and that was better than expected. March was revised downwards and that was a little surprising to me. ISM services dipped in March and it bounced right back in April. All told economic growth is good, but not strong.
The FOMC statement this week was fairly hawkish. Fed officials acknowledged seasonal economic weakness and they are forecasting strong growth ahead. That tells me that they are prepared to hike in June.
Oil prices fell sharply yesterday and horizontal support was breached. The energy sector is weighing on the market and the fundamentals don’t look good for this sector. Global supply is high and OPEC has lost its pricing power. There is a silver lining to low oil prices. Consumers benefit from lower pump prices and that is typically good for retailers. Oil is also a major expense in manufacturing and transportation. We need to watch credit in emerging markets that depend on oil revenue (Russia and Brazil).
Swing traders should be on the sidelines waiting patiently for a pullback. A breakout will not come without a catalyst and I don’t see one. A meaningful rally is unlikely ahead of a possible rate hike when economic conditions are shaky. When we do get the pullback there will be an opportunity to sell out of the money bullish put spreads.
Day traders should take their lead from financials. If banks are strong the market has a chance to rally. Also keep an eye on oil. Support is at SPY $236.50 and $238. Resistance is at $239 and the all-time high. I have been letting the early action play out and I have been finding good opportunities mid-morning. Healthcare and retail have been catching a bid and we should see some rotation out of tech. The news today was good enough to keep buyers engaged, but not good enough for breakout. We are likely to trade in a choppy range today.
The news will start to wane next week and the action could slow down.
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