Rough but not unexpected.

Rough but not unexpected, is how I would describe yesterdays price action.  The 2018 bull run has been like a 5-year old hopped up on sugar and caffeine.  It’s a blast while it lasts, but the crash after it wears off can be brutal.  On the positive side, the economic markers continue to be very strong, and thus far earnings have supported this lofty level.  On the negative side, inflation seems to be heating up, and that may force the FOMC to raise interests rates beyond whats already expected.  Elevated volatility could be here to stay at least for the short term.  Price action over the next several days could be very challenging especially for inexperienced traders.  Now is the time to maybe do a little less trading, a little more trade preparation, and become very picky about the trades you take.

On the Calendar

We have a busy Economic Calendar on this last day of January.  We get going with the ADP Employment report which is looking for a private payroll number of 195.000 at 8:15 AM Eastern.  At 8:30 AM we get a reading on the Employment Cost Index where forecasters are calling for a 0.6% rise.  9:45 AM brings the Chicago PMI which forecasters are calling for a slight easing but still a very strong reading of 64.0.  The Chicago economy is at historic highs in data that goes back more than 50 years!  We get a reading on Pending Home Sales at 10:00 AM where the consensus expects a solid gain of 0.5%.  The EIA Petroleum Status comes in at 10:30 AM, and although there is no forecast, the trend suggests oil supplies will continue to decline.  The biggest report of the day will, of course, be the FOMC Announcement on interest rate policy at 2:00 PM Eastern.

Earnings reports continue to ramp up with over 150 companies reporting today.  Stay on your toes and have plans prepared for the companies you hold or are considering for purchase.

Action Plan

An ugly day for the markets yesterday with a big gap down and saw continued selling as the day progressed.  This morning futures are suggesting a bounce with the Dow currently showing about a 200 point gap up.  I have been suggesting for some time now to prepare for higher volatility, and I suspect it will make for challenging trading for several weeks to come.

As a result, expect bigger daily swings and overall point travel during the day.  Overnight reversals are common in this environment as well as intra-day whips that can be pretty dramatic.  We have several weeks so of earnings reports yet to chew through that will add to the uncertainty.  Today after the morning rush we could see the market become very choppy as we wait for the FOMC Announcement at 2:00 PM.  With overall market trends broken and so much whipped up emotion, it may be wise just to sit back and watch the show unless you are a very fast day trader.

Trade Wisely,

Doug

The bears woke up!

The bears woke up.  We all knew the day would come when the bears would launch a full-scale assault.  Unfortunately, they used the cover of night to attack making it difficult for the retail trader.  As bad as it may initially seem let’s keep in mind good earnings are continuing to come in, and the bulls are unlikely to give up easily.

Those who chased stocks that were well within their run will suffer the most this morning.  Those that took profits along the way and reduced the number of positions held will likely experience some losses today but it should not too punishing.  It would not be at all out of the question to the Bulls mount a strong defense after the open.  Keep in mind the buy the dip crowd could rush in creating a short squeeze.  Although the this is the very first bearish follow-through day of 2018, remember it’s not the open that matters it’s how we close the day that does!

On the Calendar

Tuesday’s Economic Calendar starts off with the beginning of the 2-day FOMC meeting.  It’s the final meeting with Yellen at the helm.   At 9:00 AM Eastern the Case-Shiller report is expected to show a solid 0.6% gain.  The consensus is for the unadjusted year-on-year rate to come in at 6.4%.  Consumer Confidence is out at 10:00 AM is exp[ected to come in at 123.4 up slightly from the December reading of 122.1.  We have an another 10:00 AM report on Investor Confidence which is unlikely to move the market, a couple of bond auctions and Farm Prices report at 3:00 PM.

On the Earnings Calendar, there are just over 110 companies reporting today.  Before the bell, we will hear from PFE and MCD after the bell JNPR steps up to report.

Action Plan

The Bears decided to make an appearance yesterday closing all four of the major indexes lower on the day.  Technically the DIA got the worst of it closing below the Monday’s strong candle.  SPY and the QQQ faired much better only producing inside candles while IWM closed near the low of its consolidation pattern.  Unfortunately, the Bears waited to mount their full-on attack in the overnight session pushing the Dow futures down more than 200 points.  As I write this, the bulls managed to recover some of the overnight losses, but currently, the Dow Futures point to a gap down of 150 points.

It would appear that at the open we will see the very first follow through by the Bears this year.  Keep in mind this is earnings season, and the bulls are not likely to give up easily.  Although this may be a painful morning, try not to panic and keep in mind a strong whipsaw rally is possible assuming earnings continue to come in strong.  Remember the first move lower from a top is not where the real selling is likely to occur.  Expect some fast price action this morning as volatility spikes at the open.  We all knew this day was likely to come and that is why we plan.  Avoid making emotional decisions follow your plan.

Trade Wisely,

Doug

Runway Bullishness?

I have only seen runaway bullishness like this during the Tech Bubble of the late 1990’s.  I am not suggesting the current rally is a bubble, in fact, I don’t think we should compare to 2-events at all.  I only point this out that bullish exuberance has proven it can last for years.  I like many others believe the market is very extended and could benefit from a good pullback.  However, just because we might think it should happen does not mean that it will.

The Tech run up lasted years and had far less backing than the current rally.  This time companies are actually making money!  If earnings continue to support these high prices then perhaps we go higher still.  Don’t fight the trend but be prepared with a plan when the reversal does occur.  It could happen today or years from now, but if you’re complacent and unprepared the consequences could be painful.

On the Calendar

The last week of January 2018 Economic Calendar begins with Personal Income and Outlays at 8:30 AM Eastern.  Personal Income is seen rising 0.3% while the consumer is expected to decline this month 0.5%, but overall remains very strong.  The PCE index expects to improve just 0.1% with a  year-on-year reading of 1.7%.  Excluding food and energy, the core number is seen up 0.2% for a yearly rate of 1.6%.  At 10:30 AM is the Dallas Fed Mfg. Survey which is expected to remain very strong but this report is very unlikely to move the market.    After that, we have 3-bond related announcements and auctions.

Earnings season ramps up this week with lots of potentially market-moving reports.  Stay on your toes as a volatility increase is likely.  There are 75 companies reporting today with LMT and STX before the bell and RMBS and PFG after the bell.

Action Plan

Last Friday the bulls were out in force producing yet another gap up run day.  The DIA, SPY, and QQQ all closed at record highs.  The Dow closed above 26,500, that a 1500 point rally in just 16 trading days.  Truly remarkable bullishness with seemingly no fear of a pullback.  IWM was unable to set a new record on Friday choosing instead to rest in a consolidation pattern.  The VIX had slight decline but held onto the 11 handle at the close.

There can be no doubt that the bulls are in control and the overall market-trend continues higher.  With so many stocks well within their run higher, it makes it increasingly difficult to find low-risk entry trades.  Guard yourself against being caught up in the emotion and chasing into trades.  As I write this, the Futures are suggesting a lower open, but there are still a lot of earnings report and economic news ahead of the open that could change that.  As we wind down January earnings will be front and center as the bulk of reports will come in over the next few weeks.  Expect higher volatility with whipsaw price action as companies prove whether or not these market prices can be justified.

Trade Wisely,

Doug

Focus on price action.

The last couple days of trading the bears have reminded us that they are still lurking about looking for weaknesses.  Even though their testing has not yet yielded much in the way of results, it’s been a good reminder to focus on price action for clues of their attacks.  It’s noteworthy that as the market continues to march higher, the VIX has slowly crept up as well.  As of now the bulls are in control, but there is a good reason to have a heightened awareness if the bears continue to test the battle-line.  Friday’s have lately been very strong, and I suspect the bulls will fight hard to do the same today.  As this bull run gets very long in the tooth don’t forget to take some profits to the bank.

On the Calendar

We have three important reports on the Economic Calendar this Friday all coming in at 8:30 AM Eastern.  The Durable Goods consensus expects a 0.6% gain with ex-transportation also seen up a solid 0.6%.  The Core Durable Goods orders are expected to come in at 0.5% which is also very strong.  Next, we have the first GDP estimate for the fourth quarter that is expected to decline just slightly to 2.9%  Consumer spending is expected to have a strong showing rising to 3.6%.  Then comes the International Trade in Goods deficit is seen narrowing slightly to 69.0 billion vs. the 70.0 billion in November.  After that, we have three additional reports that are not expected to move the market.

We get a little Friday break on the Earnings Calendar only showing 44 companies reporting results today.  Next week will be a very busy week with over 500 companies scheduled to fess-up on earnings.

Action Plan

Yesterday it was the DIA doing all the heavy lifting setting a new record high as a result of the great earnings out of CAT and MMM.  The SPY, QQQ, and IWM all decided to take a little rest yesterday that at one point threatened to slip south.  However, the bulls stepped in just before it became critical buying lifing them back into a safe zone.  Overall uptrends continue to hold, and the bulls remain in control.

The new normal seems to be that every day the bulls pump up the Futures markets and today is no different.  Currently, the Dow Futures are pointing to more than a 50 point gap up that could print above 26,500.  Both the QQQ’s and the SPY are also indicating the possibility of new record high prints at the open. What an amazing bull run!  Stay with the trend because it has without question been our best friend since the beginning of the year.  Remember Friday is a very good day to bank some profits ahead of the weekend.

Trade Wisely,

Doug