Daily Commentary: September 08, 2020

Jeremy Engelbrecht1Option Commentary

The Market Needs To Find Support – Here Are the Likely Scenarios For Sept

Posted by Pete Stolcers on September 08

Last week last week the S&P 500 reversed sharply from an extremely overbought condition. We were not blindsided by this move, we were expecting it. Gains from light volume rallies can quickly be stripped away. At a current P/E of 23, stocks are expensive and we are seeing profit-taking. The second wave of the Coronavirus has impeded economic growth and the market has gotten ahead of itself. I am expecting more selling in the next two weeks and buyers will be passive until the market support has been confirmed.

The economic numbers last week were good. ISM manufacturing and ISM services were better-than-expected. The jobs report Friday show that 1.37 million jobs were created in August. I am concerned that weekly initial jobless claims have been averaging 1 million and that is problematic given that fantastic news is priced in (S&P 500 trading at a P/E of 23).

Small businesses need a fiscal lifeline and politicians are not able to find middle ground. A stimulus package is unlikely and the budget will also become an issue as the September 30th deadline approaches. The budget deficit is projected to hit $3.3 trillion next year and that will exceed GDP for the first time since World War II. An analyst for J.P. Morgan Chase feels that municipalities will have a $560 billion tax revenue shortfall this fiscal year.

There are an assortment of other “nagging” issues that are weighing on the market this morning. Trump is going to impose tighter restrictions on Chinese technology companies, Japan’s GDP was worse than expected, Coronavirus is spreading quickly in India and Brexit negotiations are at a standstill.

From a technical perspective the market could drop dramatically from here. I don’t believe this scenario is likely because the news is not that damaging. Fiscal stimulus will temporarily buoy the economy and low interest rates will keep equities relatively attractive. The economic data points have also been pretty good. A more likely scenario is that we spend a few weeks testing support at SPY $338. We will see a couple of bounces off of that level and then the bid will grow once support has been confirmed. The crosswinds are heavy and I believe that the market could move sideways in a choppy fashion until the election. There are many uncertainties and stocks are rich. At very least the market needs to spend time at this level so that valuations can catch up.

One of the nice things about being in cash is that you can evaluate the price action. This is exactly why I suggested that longer term swing traders be sidelined. All boats rise with the tide and it’s hard to distinguish the real McCoy’s. A market pullback helps us identify relative strength and we will know which stocks to buy once market support has been established. During this process we will also be able to gauge profit-taking and the appetite for stocks. Although I might feel that support at $338 will hold, there is no guarantee. As I’m watching the price action I will know if that support level is in jeopardy. By being in cash I can carefully watch without being emotionally attached and without being preoccupied with losing trades that require attention/adjustment. Longer term swing traders should remain sidelined. Start looking for stocks that are holding up well relative to the market. Have your wish list ready.

Shorter term swing traders and day traders should be ready for action. Last Friday was one of my best trading days ever for the S&P 500. I believe we will see excellent moves in both directions and we will use the 1OP indicator as our guide. This morning we will test critical support at SPY $338. If that level falls easily we will test the low from Friday. If this is a bearish trend day the market could drop to SPY $324 this week. The move higher has been extremely strong and I believe that support will be established this week. I believe that we will close above $338 this Friday, but there could be some pain before that. If the market makes a new low after the first two hours of trading we are likely to see a bear trend day. If the market quickly tests $338 and it bounces immediately we are likely to gradually grind our way back today. Be patient and wait for opportunities to set up.

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