Posted by Pete Stolcers on May 30

Posted 9:30 AM ET – Last week the market floated to a new all-time high on extremely light volume. Holidays have a bullish influence and some of those gains are being stripped away this morning. Profit-taking will surface as the June FOMC approaches. I still believe that the S&P 500 will challenge the 100-day moving average in the next few weeks.

Economic growth is moderating while the Fed has its foot on the brake. Average monthly job growth has been below 200,000 this year and we need to consistently be above 250,000 to justify three rate hikes in six months. Fed officials cited seasonal weakness in Q1 and they pointed to stronger growth in Q2. That tells me they want to take advantage of the recent market rally and they want to tighten in June.

Global economic growth is also moderating. China reported that industrial profits grew 14% in April and that’s down from 24% in March. They will post their official PMI on Wednesday and this will be an important number. Economic growth in Europe is also tenuous and ECB comments have been dovish.

Tax cuts/reform in the US will be delayed by efforts to pass a healthcare bill. This process will drag on and investors will grow impatient as politicians take time off this summer.

The backdrop is uncertain and the downside risks outweigh the upside rewards.

Swing traders should closely monitor out of the money bullish put spreads. Those positions should be profitable and I suggest closing them down if the SPY is below $240.60. That was the breakout and if it is breached the market could roll over. I also suggest buying a few July puts (half position) if the SPY closes below $240.60. Passive traders should stay in cash and wait for a pullback.

Day traders also need to use caution in this light volume environment. Trading activity is typically dull after a holiday and we can expect a fairly tight range today. If the market is able to trade above/below the first hour range you can favor that direction. If the breakout from last week fails, I will get a little more aggressive with my shorts.

Look for signs of strain this week. Late day selling and follow through the next morning would be bearish. ADP, ISM manufacturing, ISM services and the Unemployment Report need to be strong this week. If the numbers are light I believe the Fed will still hike.
Initial jobless claims have been declining in the last month and I believe the jobs report Friday will come in around 200,000 (185,000 expected).
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