Daily Commentary: August 04, 2020

Jeremy Engelbrecht1Option Commentary

It’s All About Jobs – This Is the Number To Watch [Not What You Would Think]

Posted by Pete Stolcers on August 04

Yesterday the market was able to rally to a new five-month high. End of the month/beginning of the month fund buying fueled the move and earnings season is in full bloom. Major economic releases are also on deck. After this week the trading volume will drop off and we will head into a news vacuum. I believe that the upside rewards are smaller than the downside risks.

Tech stocks have been leading the charge higher and the results have been good. Unfortunately, the market rally has been narrowly defined and the back half of earnings season will be less exciting. More than half of the S&P 500 has reported and revenues are down 8% on average and profits are down more than 30% on average. British Petroleum reported a loss of $6.7 billion this morning and Disney will report after the close today. Both businesses employ tens of thousands of workers.

A Bloomberg analyst reported that one third of all restaurants could fail in 2020. This industry employs 8% of the workforce and it accounts for 4% of GDP. The tech industry only employs a fraction of the overall workforce and I believe that job losses will be high when the PPP stimulus runs out. Hotels, restaurants, energy, transportation, financials and industrials employ the vast majority of the workforce and the virus is hitting these companies hard. At this stage we were supposed to be well into the recovery and we are not. Many states are retreating to Phase 2 or Phase 3.

In October, 23 million Americans could be evicted from their apartments. In May, 12 million people did not pay their rent. If we can’t get them back to work credit issues will surface.

Politicians are haggling over a $1.5 trillion stimulus package. They will get it done at the final hour and they will flee DC when recess begins. This round of stimulus is much smaller than what we saw a few months ago.

Trade tensions with China are escalating. The US removed favorable trade status for Hong Kong and the Chinese consulate in Houston was closed. China retaliated and a US consulate was closed. Trump was close to banning TikTok and that paved the way for Microsoft to make a bid for its US operations. China is not happy about this, but it still bans many US social media platforms. My point is that relations with China are deteriorating.

ISM manufacturing came in at 52.3 and that was a solid number. ISM services will be released tomorrow. The other important numbers are ADP and the Unemployment Report Friday. In terms of employment data, I am more interested in initial jobless claims. That is current information (not backwards looking) and weekly increases would be a warning sign.

Swing traders who can’t watch the market intraday need to be sidelined. This year we’ve seen many days where the S&P 500 has fallen more than 100 points. At the close yesterday, we were only 50 S&P 500 points from the all-time high. Resistance will build at that level and profit-taking will be stronger now that big tech companies have reported. I believe that the upside rewards are much smaller than the downside risks. The market is in a 10-year bull rally and a 3-month bull rally. Consequently, I can’t advise swing traders to short the market. The snapback rallies can be very violent. Wait patiently in cash and be ready to buy the dip when support is established. I need to gauge the strength and speed of the market drop before I can determine the best entry point. The bottom line carnage in Q2 has been completely ignored and the economic recovery will take much longer than expected.

Day traders should look for opportunities on both sides. Watch for late day selling and follow through the next morning. I won’t aggressively short until I see the uptrend line for the S&P 500 breached. SPY $320 is a critical support level. Once that is broken I will increase my trading size to normal levels and I will aggressively short. Until then, I will assume that the market bid will hold and that tech stocks can be bought on dips. Conditions can change instantly from this point forward.

Stay in cash if you can’t monitor the market during the day. Active traders need to watch for the warning signs. I still believe that a shorting opportunity is eminent.

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