We Bought the Market Drop Yesterday – Time To Make Money – Use This Stop
Posted by Pete Stolcers on October 12
Posted 9:30 AM ET – We should get used to dramatic drops like this. Once trading programs are triggered they feed on themselves and the bottom falls out. The good news is that programs also kick in on the way up (although you don’t hear anyone complaining about those). From a technical standpoint serious damage was done this wound will take months to heal. I believe we have seen the low for the rest of the year.
In my instructions yesterday I told you if the SPY traded down to $275 to buy it when it rallied above $276. That happened in the middle of the day, but we took some heat into the close. Regardless, we are back above our entry point before the open this morning and we will place an intraday stop at $275.
Earnings season kicked off today. J.P. Morgan Chase reported that profits grew 25% year-over-year and they beat by nine cents. Citigroup also beat estimates by four cents. Wells Fargo has been struggling and they miss by four cents. The financial sector needs to lead the charge. Lending was strong and rising interest rates provided a wider profit margin. Nothing calms nerves like profits. We need to see broad based strength with many sectors participating.
At a forward P/E of 16 valuations are reasonable. The recent market pullback will prompt share buybacks. I don’t believe profit warnings due to tariffs will be an issue this quarter.
Economic growth is strong and inflation is moderate (hourly wages, CPI and PPI were benign this week). Higher interest rates will be absorbed, but the initial shock typically sparks selling. The greatest threat is a credit crisis in emerging markets and higher US rates are having a ripple effect. There will be a little relief on the credit front since Turkey is going to release Andrew Brunson. That means US sanctions will be lifted.
Trade war concerns will also ease today. China’s exports were up 14.5% in September and imports rose 14.3%. No question that suppliers are stocking up ahead of proposed tariffs. This news will help basic material stocks. There were also rumors that XI and Trump would not meet on November 29th at the G20 Leader’s Summit. That rumor has been dispelled and they will meet.
A Brexit deal is very close. US negotiations with South Korea and Japan continue.
There are lots of little tidbits of good news this morning, but traders need to be cautious. I am going to buy some stocks this morning, but this will be the first of four legs. I want to make sure that the early rally holds. I will buy more on a dip and I will buy more on strength. Large drops of this magnitude typically have two or three “aftershocks”. During this first phase option traders should be selling put premium. After the retest option implied volatilities will collapse and you can consider call buying. I believe this first bounce will take us to the 100-day moving average ($282). After a few weeks we will test $276 briefly and then we should be off to the races. That second dip is likely to happen before the elections.
Day traders should get long early and lean on SPY $276 as a stop. Tech stocks were strong relative to the S&P 500 yesterday and that is where I will focus my attention. Use SPY $276 as your guide. Once the buying starts we should see a nice grind higher throughout the day. This is the dip we have been waiting for.
If by chance $276 fails (unlikely), you should hold off on buying until we are back above that level.
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