Daily Commentary: August 11, 2020

Jeremy Engelbrecht1Option Commentary

SPY Is Within Striking Distance of the All-time High – This Feels Like A Buying Climax

Posted by Pete Stolcers on August 11

The S&P 500 is set to open higher and it will be 20 points from the all-time high. It’s conceivable that we could reach that level today. Russia claims it has the first Coronavirus vaccine and that has investors excited this morning. Coronavirus cases and hospitalizations are trending lower in parts of the US and President Trump is considering a capital gains tax cut. We are in a light news cycle and that favors the current upward momentum.

The resurgence of the virus in the last two months has impeded the economic recovery. This is not going to be a “V” bottom and I believe that Q3 is setting up for disappointment. Stocks will need time to grow into their current valuations and I believe that the upside rewards are smaller than the downside risks. Republicans and Democrats were not able to reach a stimulus agreement and small businesses will suffer. President Trump used all of the tools available to him and he doesn’t have the power to approve additional funds for PPP. If he did not take executive action over the weekend we would have seen a swift market decline yesterday.

US/China relations are deteriorating and investors are numb to the news. Consulates have been closed and leaders have been sanctioned by both countries. Hong Kong’s favorable trade status was removed and technology companies have a bull’s-eye on their back. During the trade negotiations last fall, China was boycotting US agriculture. This is a commodity and I was wondering how they could shift all of their demand without impacting price. Today I learned that they were not able to. China canceled expensive Brazilian soybean purchases and replaced them with previous agreements with US suppliers. This will make it appear like they are adhering to the Phase 1 deal, but this has more to do with price than the agreement itself.

Earnings season is winding down and more than 90% of the S&P 500 companies have reported. Revenues declined 11% on average and profits were down 33% on average. This drop in profits will take time to recover and Q3 will be better, but not great. I believe that current valuations are stretched and that there is room for disappointment.

The economic numbers have been good. ISM manufacturing and ISM services were robust last week. These are surveys so they are forward-looking. The Unemployment Report and ADP were a little concerning. Job growth slowed considerably as many states retreated to Phase 3. Weekly initial jobless claims numbers have been averaging over 1 million during the last month and we need to watch this number carefully. Without another tranche of PPP, small businesses may have to lay off workers as that stimulus runs out.

This is a very light news cycle and it won’t improve in August. The political mudslinging will subside since Congress is in recess. This news vacuum favors the current upward momentum, but light volume gains can quickly be stripped away.

Swing traders who are not able to watch the market during the day should stay in cash. I know that it’s difficult to watch the market grind higher from the sidelines, but I feel we will have a better entry point if we are patient. There are many dark clouds on the horizon and I feel that bullish sentiment is extreme. Short-term market tops usually take place when there is a rotation into laggards and we have seen that in the last week. If you are a very short-term swing trader and you are able to watch the market intraday, you can still try to milk some of the remaining gains out of this rally. Keep your trade count very low and don’t hold long positions for more than a day or two. If a stock that you are long closes on its high of the day and the market closes on its high the day, consider holding some of the position overnight. I am not selling any bullish put spreads here.

Day traders should focus on the long side. Wait for market dips and buy stocks with relative strength. For the time being, day trade some of the laggards that are bouncing. Restaurant, retail, casinos and airlines are popping. Don’t overstay your welcome. Yesterday we saw a sharp 20 point S&P 500 decline after a gap higher. We could see the same today so be cautious early in the day. Once support was established we had a nice bullish 1OP cross and we were able to make excellent money on stocks with relative strength. Watch for late day selling and follow through the next day. We can’t aggressively short stocks until we see this pattern and until we have technical breakdowns. I’m still trading ½ of my normal size in the morning and ¼ of my normal size in the afternoon.

Look for a gradual grind higher. The all-time high will act as a magnet and we could challenge it today.

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