Posted by Pete Stolcers on March 26
Posted 9:30 AM – The market took a pounding last week and the S&P 500 closed below the 200-day moving average on Friday. We expected to see a big bounce off of this level and we are getting one this morning. If the move had been meager, we would have probed for support. Given that we are up almost 40 points before the open, this looks like a capitulation low. Buy stocks on the open.
The potential trade war with China weighed on the market. I told you in my comments that Trump was using this threat to get China to the table. You can’t negotiate without leverage. China imposes stiff tariffs on US goods sold in their country and until recently the average tariff was over 17%. The Wall Street Journal reported that trade negotiations have been taking place over the weekend and the market likes the news. The US signed a trade deal with South Korea so progress is already being made.
The FOMC statement last week was longer-term hawkish. The Fed said that they might accelerate tightening in 2019. A lot can happen before then and they can change their mind. As far as 2018 is concerned, they only plan to hike two more times this year. That is dovish. Inflation (price and wage) will moderate in the next few months and the Fed has breathing room. An upward sloping yield curve is good for the market as long as economic growth remains strong and as long as inflation is moderate.
Good Friday is an exchange holiday and we won’t get the jobs report until April 6th. Economic releases have been very strong.
Earnings season is right around the corner and buyers will be engaged. The bid will be strong this week.
Swing traders need to buy stocks on the open today. The market will bounce off of the 200-day moving average and we will see follow-through for a few weeks. We were trying to buy the SPY last Friday but we ran out of time and it did not cross above $260 before the close. I would not buy calls that have an implied volatility above 35. Option premiums are rich and you need to sell put spreads and buy call spreads. You have to be short premium to make money on this bounce. From a longer-term perspective, my market bias has changed from bullish to neutral.
Day traders buy some stocks early and add on dips. Don’t wait too long. The price action should be very positive all day.
This is a capitulation low – get long.
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