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Here’s Why You Should Stay In Cash the Next Two Weeks

Posted by Pete Stolcers on May 16

Posted 9:30 AM ET – Yesterday the S&P 500 challenged the 100-day moving average right out of the gate. It looked like we could be in for a nasty drop. Support was tested throughout the day and buyers were willing to nibble when that level held. The news is light and we could tread water in a tight range until trade negotiations are finalized.

Trade deals will determine market direction. China’s team will be in the US Thursday and Friday. There haven’t been any leaks so we don’t know if progress is being made. China got North Korea to the table and I’m expecting friendly trade negotiations ahead of the summit with Kim Jong Un. This process could take many weeks. China is our largest trading partner and the relationship is complex.

Trump postponed European tariffs and the clock is ticking. The EU is more fragmented and an agreement will be more difficult to reach. Sanctions against Iran (and companies that do business with Iran) will complicate the negotiations. On a side note, Iran said that it will release names of European politicians who were bribed during the Iran nuclear deal if they don’t reign in Trump.

It’s possible that a mini NAFTA agreement is signed for automobiles. Trump wants Mexico to secure its side of the border and that is holding up the deal.

Trade is critical to economic growth and to credit markets. These negotiations are all that matter and the market could move in either direction. Trump is willing to walk away from the table and that means inflammatory tweets are possible. Investors are nervous.

I’m not expecting any news ahead of Memorial Day. Trading volume is low and the SPY is likely to trade in a tight range around the 100-day MA until then.

Economic growth is strong, earnings are excellent, inflation is moderate and interest rates are low by historical standards. At a forward P/E of 16 valuations are little rich, but they are not extreme by any means.

Swing traders should be in cash. We took profits on QQQ yesterday and we will wait for trade negotiations to be finalized. This is a binary event and the outcome is unpredictable. Cash is King.

Day traders should use the first hour range as a guide. If the market breaches the 100-day MA you should favor the short side. Trading volume is light so set passive targets and take profits along the way. This is option expiration week and we typically see one big day. The S&P 500 ranged 30 points yesterday and that could have been it.

The action will subside next week ahead of the holiday.
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