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New Market High Fueled By Short Covering and Quad Witching

Posted by Pete Stolcers on June 20

Posted 9:30 AM ET – This morning the market is going to surge to a new all-time high. The FOMC statement was dovish and the word “patient” was removed. Fed officials did not give a timeline for the next rate cut, but investors don’t seem to care. Stocks are moving higher this morning and quadruple witching will fuel the move. We are likely to see short covering now that we are through the all-time high.

Bond yields are pricing in three rate cuts this year and I believe that is overly optimistic. Only 7 of the 17 officials believe that there will be two rate cuts this year. Domestic economic conditions remain strong and the Fed is influenced by the stock market. I don’t believe they will cut rates with the market at an all-time high.

Optimism over a trade deal with China is running high. Trump and Xi will meet on June 29th. Both are rattling their sabers before the meeting and the tension is high (North Korea, Iran, Huawei and arms sale to Taiwan). I don’t believe we will see a trade deal before the 2020 election.

Earnings season will start soon and traders have ignored the warning from Broadcom. Stocks are trading at the upper end of their valuation range and good news is priced in.

The market was trapped in a very tight range and now we have a breakout. Swing traders need to buy back their short position this morning on the open. I was wrong and this rally still has a lot of strength. Regardless of deteriorating global economic conditions, there are few investment alternatives. Global bond yields are at historic lows and they do not keep pace with inflation. Bond buyers lose purchasing power and investors are being pushed out on the risk curve regardless of the macro backdrop. We won’t see a prolonged market decline until credit risks surface.

All of the evidence leads to a breakdown in relations between the US and China, but my opinion doesn’t matter. Price is the only thing that counts and this is a technical breakout. I am not ready to buy this breakout on the swing basis.

Day traders should focus on the long side this morning. There will be a bid check and it won’t last long. The market will grind higher and quadruple witching/short covering will fuel the move. This will be our big trading day of the week.

Investors are ignoring trade wars, dismal global economic growth, relatively high stock valuations and geopolitical unrest. Bond yields are at historic lows and investors are plowing into stocks because that’s the only way they can preserve purchasing power and generate a decent return. I still believe the risk is very high at this level, but it won’t matter until we have a credit crisis. In 2000 stock prices were extremely over-valued and it did not matter, the market continued to surge higher. I believe this is a similar scenario.

Follow the momentum and use stops.
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