The market is addicted to easy money, but there’s a reason the central bank is easing.

PRE-OPEN MARKET COMMENTS THURSDAY – This morning the ECB cut interest rates by 25 basis points and that was widely expected (94% odds). They are worried about economic growth prospects and they are blaming tariffs. Activity around the globe has been slowing for more than a year. The tariffs are creating uncertainty, but the real issue is debt. Consumers are cutting back.

When central banks cut interest rates that should be bullish – right? Initially, it can be. After a number of rate cuts, that sentiment changes. Previous rate cuts are not stimulating activity and central banks reach a point of urgency. They cut more aggressively in hopes of avoiding a recession. Europe and China have been on this slippery slope for over six months and we’ve reached the stage where rate cuts are NOT bullish. Investors worry that the issues are too deep and that no level of easing will stimulate growth.

Yesterday Powell said that the Fed is happy with current policy and that means we can expect “higher for longer”. They see soft economic conditions ahead, but nothing dire. This morning Philly Fed fell -26.4%. That is a very weak reading. Initial jobless claims came in at 215K and employment is stable.

TSM reported strong earnings and they are preserving their outlook even with all of the tariffs. The prior day ASML (a semi equipment manufacturer that TSM uses) said that customers are holding off on new purchases. Earnings season is going to kick into high gear next week and I believe the guidance will be cloudy.

The news is fluid and it is impacting the market on a daily basis. We are seeing volatile price swings. Here’s how I look at it.

1. Are there going to be trade deals? Yes. They will benefit the US, but the counterparty will not be happy. There will be tariffs and 10% is the baseline. We don’t know how high they will go.
2. With or without tariffs, global economic conditions have been softening for over a year and that is the real issue. There is no growth engine.
3. Credit levels are at extreme levels and we are seeing big currency and bond swings. That volatility is a sign of trouble.
4. The budget is likely to get approved by the Senate and there will be tax cuts. That is short term bullish for the market.

From a fundamental standpoint I see weakening conditions in terms of activity and credit. There will be some short term bullish events, but they won’t change the macro backdrop.

From a technical perspective, last week’s monster move was largely mechanical. It sparked massive short covering and it ran its course in one day. There was no follow through and the SPY was not able to challenge resistance at $550 before being turned back. The selling pressure is starting to build and the SPY closed below AVWAPQ.

From a swing trading standpoint I would manage gains on the naked put sales the last two weeks. If the spreads are trading for pennies buy them back. The gains have been realized. The remaining positions are way out of the money so they should be easy to manage. I am starting to take a few starter shorts. I realize that there is good news pending and that I am likely to take heat in the next week or two. That’s why I am keeping my size small. The chance for a nice drop from here is also fairly high and that is why I am taking bearish starter swing positions. I am leaning on the longer-term technicals.

From a day trading standpoint, we are in pre-holiday mode. I would prefer a wimpy bounce to start the day. If I get that, I will be looking for shorts that are not able to rally with the market. When the market hits resistance, I will short these stocks. If the first move of the day is a wimpy market decline, I have to be more cautious. I want to trade from the short side. I may try the long side, but the stock would have to be very strong. I will trade smaller size and I will make sure that I enter well. Given my market bias, I can’t risk a bad entry because I have no intention of holding longs overnight. If a short position moves against me intraday, I have the latitude to hold the short over the weekend. Consequently, I will be day trading with larger size when I short.

Support is the low from yesterday and resistance is the high. The action is likely to slow down after the first two hours of trading.