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Posted by Pete Stolcers on May 25

Posted 9:30 AM ET – Yesterday the FOMC minutes revealed that the Fed is still likely to hike rates in June. The market inched its way to a new all-time high and we are seeing follow-through buying this morning. That is contrary to what you would expect and I don’t trust this rally.

There are too many unresolved issues for a sustained breakout. This is just a light volume holiday rally.

Politicians are in a stalemate and it will be a long time before we see tax cuts. DC goes on vacation during the summer and nothing gets done (hard to imagine their productivity could go down from current levels).

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Economic growth is moderating. China’s numbers have been treading water and domestic job growth has not been able to stay above 250,000.

The Fed will take advantage of the recent market rally and they will hike in June. This will be the third rate increase in six months and it is not supported by economic growth.

Corporate earnings were good, but not robust. Analysts are still counting on tax repatriation and a decrease in the corporate tax rate to boost profits.

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Most sectors have not participated in the rally and it has been narrowly confined to the tech sector. Global Asset Managers have been selling US equities.

Until some of these conditions change, I can’t embrace the rally. Profit-taking will surface as we get closer to the June FOMC meeting.

Swing traders should have some bullish put spreads on. Place your stops and let time decay work its magic. I don’t want to “get cute” with the last 2% of this rally when the backdrop is fragile. The conditions I’ve mentioned need to change for me to get long. Alternatively, we need to see a nice pullback to the 100-day moving average.

Day traders can expect quiet trading conditions. Make sure the early rally holds. Tech stocks are up, but oil is down. If the market makes a new high for the day after the first hour you can trade from the long side. Favor tech stocks and set passive targets. If the market makes a new low for the day after the first hour of trading you can favor the short side. I believe we will see an early rally and the market will fall into a tight trading range. That has been the pattern this week.

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