RELIEF RALLY WILL BE TENUOUS – STAY IN CASH FOR 1 MORE WEEK
Posted by Pete Stolcers on October 31
Posted 9:30 AM ET – Yesterday the price action was extremely choppy with 20 point S&P moves in both directions. The final move was to the upside and this is the first decent close we’ve had in weeks. This price action was constructive and it tells me that there are buyers. In October we’ve only seen sellers and once the momentum has established for the day the bottom falls out. We need to break this pattern of higher opens and lower closes. I sense that a bottom is close, but we will see lots of volatility ahead of the FOMC and the elections.
Facebook is up after reporting earnings and tech stocks have a small bid. Profits exceeded estimates and revenues were in line. Monthly subscribers were a little light. The stock is up and this is a relief rally after a quarter of heavy selling. Apple will report earnings Thursday after the close. In general, earnings have been excellent. At a forward P/E of 15 valuations are reasonable.
China’s PMI came in at 50.2 and that is a weak reading. It is close to 50, signaling economic contraction. Europe posted preliminary Q3 GDP of .4%. This is a miserable number and global economic activity is slipping.
This morning ADP showed that 227,000 new jobs were created in the private sector during the month of October. That is a very strong reading and domestic economic activity is robust. Tomorrow we will get ISM manufacturing and Friday we will get the Unemployment Report. The wage component is what I’m really interested in and a reading of .3% or lower would give the Fed some breathing room.
The FOMC statement will be released a week from today and the election results will be known. Both of these events will have a major impact on the market and we will see choppy trading ahead of the news.
Swing traders need to remain in cash. The opening rally today feels good, but we’ve seen many of these reverse. I suspect that this one will gain traction and we will see a small bounce to the 200-day MA. The macro backdrop is deteriorating and the nine year rally could be topping out. We are going to wait for the news next week.
Day traders should look for opportunities to get long. The early rally will be tested and the bid will hold. Buy the dip once support is established. This bounce might last a couple of days, but I’m still expecting very choppy conditions.
In order for the market to have a decent bounce we need the Fed to postpone the December rate hike and Republicans need to win the House. After the recent market decline the Fed should soften its tone. The elections are a tossup and anything can happen. Even if both events go our way, slowing global economic growth, credit concerns and tariff wars will weigh on the market.
A year-end rally to the all-time high is extremely unlikely and if it happens we would have a great shorting opportunity. The selling we’ve seen this month has been extreme and it is a warning sign.
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