Market Will Be Range Bound in August – Here’s Why
Posted by Pete Stolcers on August 2
Posted 9:30 AM ET – The market will be trapped in a range the next month due to opposing forces. Strong earnings have been offset by the threat of a trade war with China. Economic growth is robust, but the Fed will tighten aggressively. Politicians and traders will take time off in the next few weeks and the market will chop back and forth on light volume.
Apple stopped the hemorrhaging in the tech sector when it posted better-than-expected results. Earnings season has climaxed and more than 80% of companies have exceeded earnings estimates. At a forward P/E of 16 the S&P 500 is trading at a reasonable valuation. With each passing month profits will grow and it will be harder to keep a lid on the rally.
The FOMC statement was hawkish. Two more rate hikes are possible this year and September is a given.
ISM manufacturing was a little light, but a reading of 58.1 is still very strong. ADP reported that 219,000 new jobs were created in the private sector during the month of July. That bodes well for tomorrow’s Unemployment Report and I expect to see wage inflation of .3% (still contained but hot).
The news that Trump would increase tariffs to 25% on $200 billion worth of Chinese goods was telegraphed throughout the day. Traders shrugged off the news and I believe the drop this morning will be relatively contained. A few months ago this news combined with a hawkish Fed statement would have sparked massive selling.
Regarding possible trade wars, the backdrop is improving. Europe wants to negotiate and the goal is zero tariffs. GDP in the EU grew a meager 1.4% so they can’t afford a trade war. Mexico’s newly elected president wants to improve US relations and he wants a trade agreement. Trump has already stated that an agreement is close at hand, but he wants Mexico to secure its northern border.
China is digging its heels in and they are starting to feel the effect. It’s PMI for July was light and exports are declining. China’s stock market is down 30% from its high this year. Xi does not have to worry about elections (Trump does). Both sides are playing “hardball”.
Swing traders are sidelined. We need to let these opposing forces play out. During the process we might see a nice market pullback and that will provide an opportunity to get long. The QQQ is below technical support at $178 and the SPY will open below support at $280 this morning. I don’t want to short the market overnight because the macro backdrop is very bullish. If trade negotiations with China improve the market will jump.
Day traders should look for an opportunity to get long this morning. Let the wave of selling run its course. The news (hawkish Fed and increased tariffs) was out yesterday and traders didn’t care. If we were going to see heavy selling it would have happened before the close Wednesday. Consequently, I believe the market will probe for support and it will bounce. Use SPY $280 as your guide. If we are above it focus on the long side. If the market makes a new low for the day after two hours of trading, focus on the short side and favor tech stocks.
Expect choppy trading for the next month. Although unlikely, a drop to the 200-day MA would represent a fantastic buying opportunity.
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