Daily Commentary: February 05, 2024

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I’m Market Neutral Short-term

Posted by Pete Stolcers on February 05

I’ve been as bullish as I can be since the middle of October, but we need to tread cautiously for a few weeks. Here’s why.

PRE-OPEN MARKET COMMENTS MONDAY – Friday I told you to ignore the “good news is bad news” crowd. The pullback after the jobs report was a gift and the market surged higher. The market needs time to digest those gains.

The global economic backdrop is soft so we do not have that tailwind. Domestic economic growth is strong and so are credit conditions. Robust job growth and higher wages will fuel consumer spending and that is good for corporate profits. Stock valuations are a bit lofty and mega cap tech earnings are behind us. The issue is that the largest 10 companies in the S&P 500 have accounted for most of the gains in the last few months. Powell said that we are not going to see a rate cut before the May meeting in his 60 Minutes interview last night. The market is priced for perfection and conditions are not perfect.

From a technical standpoint the dip we were looking for only lasted one day. We wanted “brief and shallow”, but that was hardly a dip. A breakout like this needs to have immediate follow through. If we don’t see that, it’s a sign resistance (profit taking). I will be watching to see how hard the market has to fight to get to SPY 500 this week.

I suggest staying in day trading mode at this juncture. Last week we took gains on swings into the FOMC statement and we were able to catch the move Friday. Don’t worry that you are going to miss another big run higher. This morning you will have time to watch the dip and patiently wait for support. Once it is established, the market will try to take out the high from Friday and you will have time to find stocks with relative strength. If you get “stuck” on a day trade, you can carry a few of them overnight with fear that the bottom will fall out. However, you should work on your entries and avoid that.

Why has my mood changed from wildly bullish to slightly bullish? Longer-term I am still very bullish. Short-term I feel that the momentum is going to wane and I am neutral. The market leaders (tech) have run hard and they need time to digest gains. We are not seeing a broad-based rally. For the market to move higher, we need other sectors to participate. When I flip charts I am seeing two patterns. Stocks that are on a rocket shot (unsustainable) or stocks that have been chopping around (not much momentum).

Now that mega cap tech earnings are behind us, I believe that some of the excitement will wane. Profit taking will be more pronounced because longs did not want to exit when the companies that have fueled this rally were about to report. Shorts were passive into those earnings and they will be more aggressive. The news is also light this week (ISM services after the open today) so that will not fuel the move higher. This extra supply will keep a lid on the market for a couple of weeks (or more).

A market dip would be very revealing. It would tell us how aggressive sellers are. If the market does not retrace and we compress at the current level for a couple of weeks, we will know that the next leg higher is coming soon.    

If you are a long-term swing trader with a 2+ month horizon, no worries. Stay the course and know that you will have to weather a pullback or a compression. If your time horizon is less than that, I feel that waiting two weeks will provide you with much needed information and a better entry point.

Down opens are the best scenario for day traders. We can wait for support and it will be easier for us to find relative strength. Be patient, especially if you see long red candles. Gaps up to a new high represent danger. This is the one scenario where day traders can get caught. DO NOT CHASE A BIG GAP UP!!! They are likely to be faded and we could see a nasty gap reversal at this level. That selling could accelerate and it could set up a dip.

Support is at SPY $490 and resistance is at $500.

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