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Appetite For Stocks Is Low - Earnings Not Producing the Expected Bounce

Posted by Pete Stolcers on April 16

Posted 9:30 AM ET – The market is compressing above the 200-day moving average and earnings season is helping it tread water. Buyers are not rushing in as they typically do ahead of the announcement cycle. Political news is driving the day-to-day action.

Friday stocks opened on a positive note and the move was fueled by solid earnings from big banks. Financials instantly reversed along with the market and that formed a bearish engulfing pattern (last candle on SPY chart). This is not the price action I expected.

Investors feared a Syrian air strike over the weekend and there was a chance that something could go wrong. The targets were hit and collateral damage was minimal. This mission had the potential to drag us back into the conflict. The market is relieved by the outcome and stocks are bouncing this morning.

This is a low probability trading environment. Technicals and fundamentals are not driving the action. The market hangs on every word from DC. A trade war with China, Russian collusion, Syria airstrikes, North Korean missile testing, an FBI raid on Trump’s attorney and the possible firing of special counsel Mueller are just some of the political winds that are in play.

Stock valuations are at the upper end of their range. There is room for a pullback. Healthy profits normally attract buyers, but we didn’t see that last Friday.

Swing traders should remain long XLE and XLF. Use the respective 200-day moving averages as your stop on a closing basis. If we do not get an earnings bounce we will see selling in May. The next two weeks will be telling.

Day traders should look for an early probe lower. Opening gaps higher have been faded and the bid will be tested. If the market can maintain the early gains for the first hour, we should see a gradual grind higher. Use the first hour range as your guide.

I am more cautious today than I was Friday. Banks reported good earnings and they dropped. That is a warning sign and I will be watching for signs of a bounce in this sector. BAC beat earnings estimates this morning. Investors are nervous and some of the background noise needs to fade.
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