Well, once again the market seems to have bounced off support around the 1040 level on the SPX (1020 being the next level of support). We had bad economic data and WORSE economic data – but hey – it wasn’t as bad as predicted! So, what is the market really reacting to?
I suggest to you that the market is caught in a range. That range seems to be 1020 – 1130 on the SPX. We don’t drop below it, and we can’t get above it… yet. At this point in time, the market just isn’t sure WHERE we should be going.
(chart courtesy of www.stockcharts.com )
Quite simply, there’s a lot of confusion about the health of the world economy. Things seem bad, but are still expanding. Houses just aren’t moving yet corporations are sitting on unprecedented amounts of cash. The Fed stands ready to “do whatever it takes” yet those same actions could bankrupt the country…
The market is looking for some sort of clarity. ANY sign, positive or negative, has a dramatic effect on the markets, yet when we reach the levels of support and resistance, the market seems to no longer be concerned.
What is it going to take for the markets to break one way or another? Clarification. Some sort of indication from economic reports. Some sort of validation that things really ARE in bad shape and we should trade very bearish, or that things are not as bad as they seem and we should allow ourselves to invest in riskier assets (think equities versus the “bond bubble” that has built). In the Spring of 2009, the markets hit a bottom. Remember that they were driven there primarily by fear. Once much of that fear dissipated, the market went on a long bullish run. Now, stocks are quite arguably undervalued once again with many big name Fortune 500 companies trading at multiples less than 10… Is it time to buy? Is it time to be in cash? Is it time to short the market? No. It’s time to play it safe. Trade well outside of the likely ranges of the markets and equities. Wait for the clarification to come. It will come. Probably in the month of September, but there’s no guarantee here.
After Labor Day the typical “Sell in May and go away” doldrums of summer should subside as traders return to their desks. Expect market volatility to pick up a bit more. Many will be quick to point out that September is typically a weak month for the markets. Dig a bit further and you will find that September is typically a bad month when July and August were GOOD months. That’s not the set up this year. Besides, as much as we may like to look at the past for guidance for the future – we’re in unchartered waters and the past loses it’s potential impact on the future. Keep an eye out for news. Real news. News like a couple of major economic powers having their debt downgraded (a bad thing), job numbers (releasing this Friday at 08:30 eastern) coming in better than expected (a good thing), or anything that really helps traders to get a feel for where the economy is heading.
For now, the trading range holds. At some point, it WILL break. The big question is, will it be bullish or bearish? To us, OptionsAnimal students and traders, it doesn’t matter. We’ll trade it either way. For those who are not OA traders/students… Be careful. The stove is quite likely to become very hot.
Keep your eyes on the ball and have your exits well planned and capitalized.
Jeff McAllister
OptionsANIMAL Instructor
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