Daily Commentary: October 29, 2018

Terrie Amengual1Option Commentary


Posted by Pete Stolcers on October 29

Posted 9:30 AM ET – This morning the S&P 500 is up 30 points. These opening rallies feel great until they reverse late in the day. We have seen a bearish pattern of higher opens and lower closes. Last week I outlined three things on the market’s Christmas list. We need at least two of them for sustained bounce.

China is not going to sign a trade agreement this year so this will be a giant lump of coal in the stocking. The G20 meeting between Trump and Xi at the end of November is tenuous. China’s economic growth is slowing and a report over the weekend shows that corporate profits are down for the fifth straight month.

The November elections are a week away and Republicans need to win the House and Senate. Trump’s agenda has been market friendly and investors want him to continue unimpeded by House investigations and possible impeachment proceedings. Betting lines suggest a 35% chance of Republicans winning the House. There is a 75% chance that Republicans will retain control of the Senate.

The third and final item on the Christmas wish list is a softer tone from the Fed. Ideally, they will postpone the December rate hike. Many investors are worried that they are tightening too quickly. This gift might actually happen since the Fed does monitor market conditions. Higher bond yields are forcing money out of equities and into fixed income.

Domestic economic activity is strong and preliminary Q3 GDP came in at a robust 3.5% last week. Unfortunately, global growth is starting to slip in Europe and Asia.

Corporate earnings have been excellent, but buyers are passive. Stocks are fairly cheap at a forward P/E of 15, but investors are more focused on a macro backdrop that is filled with uncertainty.

Swing traders are in cash. We were stopped out of our SPY position last week and we will not reenter until the election results are known. I don’t believe we will see a big rally ahead of the election results. Traders will wait on the sidelines. If Republicans retain control of Congress, the market will jump and we can enter at that time.

Day traders should watch for signs of weakness. Once the rally stalls the market will probe for support as it has done the last few weeks. I will be looking for shorting opportunities. Use the first hour range as your guide.

Look for choppy action ahead of the November elections.

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