Posted by Pete Stolcers on August 1
Posted 9:30 AM ET – Yesterday the market gapped higher on strong results from Apple. Stocks rallied and it looked like the market might challenge the all-time high. Profit-taking started almost immediately and the headwinds are stiff. The FOMC statement sparked selling as expected and stocks tumbled. I’ve been pointing to this timeline for weeks and I believe the market is set for a pullback.
After Apple posted strong results the stock retraced the entire day. If it breaks critical support at $212 it will roll over. I expect it to test that important breakout and if it holds the stock will be poised to eventually move higher. All of the mega cap tech stocks have reported and the “air will be let out of the balloon” over the next few weeks. If the market was going to breakout with follow through we would’ve seen it already. At a forward P/E of 17, great news is priced in and stocks are trading at the upper end of their valuation range.
Much of this rally is predicated on three rate cuts this year. A quarter-point move was expected yesterday and the market got what it wanted. Additionally, the balance sheet “roll-off” was terminated two months ahead of schedule (dovish). During his press conference, Fed Chairman Powell said that a rate cut does not signify the beginning of a trend. The market dropped 50 S&P points on the news and a September rate cut is now in question. This is the last “Fed speak” for a long time and this remark will have a lingering negative impact on a market that is addicted to easy money. Most Fed officials still expect two rate cuts this year so I feel that the market drop has more to do with profit-taking/valuation than it does with Powell’s comment.
US/China trade negotiations did not yield any significant results, but it doesn’t matter. The market just wants the dialogue to continue.
Official PMI’s were in line with expectations. China was slightly better, but manufacturing is still in contraction territory.
ADP reported that 156,000 new jobs were created in the US during the month of July in the private sector. This is a perfect number (not too hot and not too cold). ISM manufacturing will be released this morning after the open. It is still in expansion territory, but the trend has been lower the last few months. I’m expecting an in-line jobs report tomorrow.
A hard landing for England is very possible, but the market won’t care for another two months.
Swing traders should take a short position on the open. We will use a close above SPY $300 as our stop. Today we will see if sellers are anxious to unload more stock. The NASDAQ 100 is close to falling below its breakout from the April high. If this happens we will see selling in the tech sector. Tech has been the leader and the market won’t move higher without it. Politicians and the Fed are in recess and investors get nervous in August.
Day traders should short early in the day. The market won’t bounce until the downside is tested. We hit a nasty “air pocket” yesterday and bullish speculators are about to get flushed out. If the market makes a new low for the day after two hours of trading, stick with the short side. If support is established and the low of the day holds, buy stocks with relative strength that have reported strong earnings.
I suspect that we will see more selling in the next few weeks. The volume will dry up during a news vacuum the next few weeks and yesterday’s Fed comments will keep a lid on the market. Watch for profit-taking.
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