Daily Commentary: July 21, 2023

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Don’t Chase the Gap Up Today

Posted by Peter Stolcers on July 21

The drop yesterday carries more weight than the one last week. Sellers will test the bid.

PRE-OPEN MARKET COMMENTS – The SPY gained 10% in the last month. The FOMC statement will be released next Wednesday and mega cap tech companies will post earnings next week. Traders will be anxious to see if those releases are consistent with the recent rally. I am not expecting much movement the next 3 trading days and we will be in “wait and see” mode.

The Fed is going to hike rates by 25 basis points. They can justify the move because core inflation is still high. Recent economic data points have been good, the bank stress tests show that balance sheets can withstand a recession and the market is at a 52-week high. This gives the Fed plenty of breathing room and most Fed officials believe that there will be one more rate hike this year after the one next week. I don’t view the initial reaction as being bearish because the market is expecting the rate hike. I do believe that the threat of a September rate hike will weigh on the market towards the middle of August when the Fed is in recess.

Mega cap tech stocks will be in focus. They have run up recently on AI excitement. That potential will be hard to measure and they could retain current lofty valuations. AI is deemed to be “the next big thing” since the internet. Having been through the dot com bubble, I can tell you that perception is everything and “valuation” is sometimes meaningless because the “E” in a P/E ratio is unknown. This is another reason to follow technical and not fundamentals.

The market has had a nice run and buyers are in control. The Fed is almost done tightening and after the most aggressive rate hikes ever, the economy has not toppled. This is the prevailing thought. After massive helicopter drops and endless money printing, that cash has to go somewhere. The threat of an economic meltdown is being discounted and money is flowing back into equities.

August and September are historically weak months for the market. Once mega cap tech stocks report, some of the excitement will wane. The market will get nervous when the Fed is in recess. This is just a normal seasonal pattern. We saw a rally on Q2 earnings in July and then a decline (Aug-Sept) in 2020, 2021 and 2022.

The action should be rather dull the next few days. I would wait to see if this gap up holds. Don’t chase. The backdrop today is different from the pullback last week. Yesterday we had weak earnings and the tech sector sold off pretty hard. The sellers from yesterday are going to test the bid and they have not gone away.

Support is at SPY $450.50 and resistance is at $456.40.

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