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Can Helicopter Drops Of Money Prevent A Coronavirus Credit Crisis?

Posted by Pete Stolcers on June 30

Posted 9:30 AM ET – Yesterday the S&P 500 rallied above the 200-day moving average and support was confirmed. End-of-quarter fund rebalancing had a negative influence on the market and that influence has run its course. Beginning-of-the-month fund buying and the eve of Q2 earnings season should attract buyers. Coronavirus fears will constrict consumer spending, but quantitative easing and fiscal stimulus will be initiated if the economic recovery stalls. Buyers and sellers are paired off and the market is likely to trade in a range for the next six weeks.

The Coronavirus is spreading and some states are returning back to Phase 3 (or postponing Phase 4). That is the way that this reopening was supposed to play out. Areas that had a rise in new cases were supposed to act accordingly. It’s true that the number of tests are increasing rapidly, but it is the percentage positive that is concerning. It had been averaging 4.5% and states like Texas are close to 14% now. There were reports of a new virus in China (swine flu) and this will keep fear elevated.

China’s Dragon Boat Festival is a major holiday and attendance was down 49% year-over-year. Revenues were down 69% and this news suggests that the global recovery will be much more gradual than expected. China’s economy reopened two months ago and analysts were hoping that life would get back to normal by this time.

China did have some positive overnight news. The manufacturing PMI came in at 50.9 (50.6 expected) and that was better than the 50.5 last month. Manufacturing is squarely in expansion territory.

Jerome Powell will testify before Congress and we can expect dovish remarks.

Earnings season is a couple of weeks away and that typically keeps buyers engaged. Micron posted solid results and the stock is up 6% after the number. Big oil has been hit hard by the Coronavirus and Royal Dutch Shell said that it will take write-downs in excess of $15 billion. The majority of CEOs have said that Q2 will be much worse than Q1.

For every bullish influence there is a bearish counterpart. The market remains trapped in a range and we are seeing decent price movement. Only time will provide clarity and the market could move higher or lower depending on the spread of the virus and the speed of the recovery. This is a low probability trading environment and cash is king.

Swing traders should sell out of the money bullish put spreads sparingly. Focus on strong stocks that will benefit from the Coronavirus and avoid the ones that have parabolic price movement – don’t chase. This strategy will produce some income while we wait and you can take advantage of time premium decay. I like selling bullish put spreads that expire in three weeks or less so that I can evaluate changing conditions on an ongoing basis. Look for nice consistent price-performance and breakouts that have recently pushed the stock through technical resistance.

Day traders should look for a fairly quiet day. Traders will square off ahead of major economic releases Wednesday and Thursday. The employment numbers will be important. Know that trading volume will decrease heading into a major holiday. Use the 200-day moving average on the SPY as your guide. As long as we are above it I will favor the long side. I will be trading half of my normal size in the morning and 1/4 of my normal size in the afternoon. The 1OP indicator is the key to our day trading. If it is spiking, take profits on long positions and look for possible shorting opportunities. If it is tanking, take profits on short positions and look for opportunities to get long. We are likely to stay within the first hour range and if this happens you should trim your size and your trade count. Try to find a few good trades early in the day and don’t give your profits back.

There are opposing forces at work and you should expect choppy, news driven price action the next few weeks.
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