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Buy Puts - Sellers Are Back In Force Today - Tariff Delays Not Enough

Posted by Pete Stolcers on August 14

Posted 9:30 AM ET – Yesterday the market shot 40 S&P 500 points higher rate out of the gate. News that Chinese tariffs would be delayed until December 15th sparked optimism and we blew through the 100-day moving average. After the initial surge the trading range compressed. That was a sign that buyers and sellers were paired off. Resistance at SPY $294 is stiff. Dismal overnight economic news is erasing Monday’s gains.

China’s industrial production grew at its slowest pace since 2002 (4.8% Y/Y) in July. China’s retail sales increased 7.6% and that was lower than expectations (8.6%). Political unrest in Hong Kong will weigh on business/consumer sentiment. Chinese investors fear that a prolonged trade war with the US could impact growth and they are curbing consumption.

Germany’s GDP declined .1% in the second quarter. One more quarter of negative growth and they will officially be in a recession. This is the largest economy in the EU. England is securing bailout funds for corporations that would be negatively impacted by a hard exit. England and the EU are playing “chicken” and this storm is approaching.

A trade deal with China won’t stop the global economic downturn. However, it would decelerate the pace. Unfortunately, we won’t see a trade deal before the 2020 election. Trump said that he delayed the tariffs because he did not want to impact Christmas buying – hogwash. That inventory is already in the US. China has devalued the yuan and consumers won’t notice a difference. Trump delayed the tariffs to restore market confidence. A record high for the S&P 500 is one of his battle cries.

If Trump wants to restore market confidence he should focus on deals he can close (Canada/Mexico (USMCA) and Japan). Japan should be willing to do a deal now that it is in a trade war with South Korea.

Argentina is in trouble and credit concerns are brewing.

The Fed and Congress are in recess. Investors typically get nervous this time of year. Global bond yields are plunging and central banks (India, Thailand and New Zealand) recently cut rates. This is putting downward pressure on U.S. Treasury yields and the yield curve has not been this flat since 2007. This is a flight to quality and a sign that trouble lies ahead.

Earnings season is over and great results were not good enough to fuel a rally. At a forward PE of 17, stocks are trading at the upper end of their valuation range.

Swing traders should not have bought puts yesterday on the open when the market was flying higher. We were through our stop (SPY $290) in the first 15 minutes of trading. If you did buy puts, don’t worry. The market is back where it started yesterday and I’m expecting selling today. Use a close above SPY $290 as your stop. If you did not buy puts yesterday, watch the first hour of trading. If we make a new low for the day after the first hour, take a short position. Use a close above the 100-day moving average as your stop.

Day traders should watch for an early bounce. Use $290 as your guide. If we stay below it, favor the short side. If we trade above it, favor the long side. I will be looking for a shorting opportunity off of an early bounce that stalls below $290.

The global macro-economic backdrop is weak. Tariff delays will not stop the bleeding and the market realizes this. We should test the 200 day moving average by the end of the month.
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