Bears Find Strength in 2021 Taper Fears

Markets just ground sideways Wednesday…right up until the July FOMC minutes came out.  From that point onward the bears just hammered the bulls as stocks went out on the lows.  This left us with nasty black candles with upper wicks and short-term downtrends in all 3 major indices.  On the day, SPY lost 1.07%, DIA lost 1.04%, and QQQ lost 0.96%.  The VXX gained almost 7% to 29.05 and T2122 dropped well into the oversold territory at 8.47.  10-year bond yields held steady at 1.265% and Oil (WTI) dropped over 2.6% to $64.83/barrel.

The cause of that sharp afternoon selloff was the July Fed Minutes.  As had been signaled by recent Fed member statements (but apparently not believed), the FOMC has had discussions about tapering its bond-buying program this year.  In fact, most of the participants noted that if the economy continues to evolve as expected, they'd support tapering bond purchases before year-end. Not today, but perhaps announcing a timetable at the September meeting and then slowly beginning the taper in October.

Strong Retail earnings continue to be the theme of the week.  So far this morning, M absolutely crushed their report (beating by $668 million dollars on revenue and coming in 11 times higher than the average estimate on earnings, $1.29 vs $0.18 expected).  KSS also more than doubled the average analyst estimate on earnings and raised guidance for the full year. Finally, while TPR beat, it was a pedestrian beat by comparison to the other two retail names reporting this morning.

In other retail-related news, CNBC reports that AMZN is planning to open large retail locations, starting in CA and OH.  The stores will be similar to department stores but on the small side of size, similar to a KSS store. Meanwhile, in addition to their earnings, M also reported that they have partnered with “Toys R Us” and will offer that brand via “shop within a shop” areas in 400 of the M stores starting in 2022.  

Overnight, Asian markets were strongly in the red again as even more Chinese regulations were announced.  Taiwan (-2.68%), Hong Kong (-2.13%), and South Korea (-1.93%) led the parade, but losses were widespread and significant.  Only New Zealand (+1.87%) bucked the trend as its national 3-day lockdown continues.  In Europe, markets are down sharply across the board at this hour.  The FTSE (-1.98%), DAX (-1.75%), and CAC (-2.44%) are typical for the continent at mid-day.  As of 7:30 am, US Futures are pointing to gap-down follow-through of yesterday afternoon’s selloff.  The DIA is implying a -0.91% open, the SPY implying a -0.83% open, and the QQQ implying a -0.69% open at this hour.  10-year bond yields are also falling, now at 1.23% and Oil (WTI) is off almost 4% to $62.98/barrel in early morning trading.

The major economic news scheduled for release on Thursday is limited to Weekly Initial Jobless Claims and Philly Fed Mfg. Index (both at 8:30 am).  The major earnings reports scheduled for the day include BILI, BJ, EL, KSS, M, PFGC, and TPR before the open.  Then after the close, AMAT, FTCH, and ROST report.

Fear of Fed tapering, combined with slowing economic data and the Covid-19 resurgence are giving the bears plenty of ammunition. This might not have been helped when HOOD warned of a slowdown in trading volume. So, the long-awaited pullback is underway with the 50sma as the destination (possible support?) this morning. Beware of volatility, remember that the longer-term trend is still bullish, and remember that we are only 2.5% off the all-time highs as well as bear moves tend to happen faster than bull moves. So, trade carefully.

Today is the kind of day where it pays to remember two things. Cash is a position. And you don't HAVE to trade every day. Always manage your existing trades before chasing new ones. Focus on the process and on managing what you can control. Trading rules and discipline are what separates long-term success and failure in trading. So, trade with the trend until the trend is broken. If you miss a move, just admit it and move on to the next trade. Never chase price on an entry and remember to keep your losses small by managing stops. And always consistently take profits when you have them.

Ed

Swing Trade Ideas for your consideration and watchlist: No trade ideas today. You can find Rick's review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

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