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We Bought Back Our SPY Short For A Tiny Loss - Market Still Has Some Gas In the Tank

Posted by Pete Stolcers on May 8

Posted 9:30 AM ET – Yesterday the market tried to rally above key resistance at SPY $288 but it finished just below that level. Week economic reports have not sparked selling and the focus is on the reopening of global economies. This reaction to negative news tells me that the market is not ready to roll over yet so we bought back our short position for a tiny loss. The S&P 500 is up more than 30 points this morning after a dismal Unemployment Report.

A record 20.5 million jobs were lost in April and the unemployment rate jumped to 14.7%. The S&P 500 is up five points after the news and buyers are focused on the recovery. ADP reported 20.2 million job losses in the private sector during the month of April and the market has been able to tread water since that release Wednesday.

There was some concern that the US and China could be back in a trade war, but the two countries nailed down their differences overnight and that is sparking the rally this morning. Plans have been confirmed so that both countries to live up to their obligations.

China’s exports increased 3.5% when a decline of 15% was expected. Buyers liked the news yesterday and the market gapped higher. Most of the export gains came from an order backlog and from medical supplies. Once this backlog has been depleted we will see if the demand remains strong. Imports were down 14% as expected and that suggests that future activity might subside.

China is the first economy to reopen and they are being viewed as a litmus test. Disney Shanghai reopened and it was instantly sold out. Chinese officials are asking the theme park to limit attendance to 30% of capacity. Other companies like McDonald’s have suggested that consumers are still very cautious and that the recovery in China is tenuous. I believe that will also be the case around the rest of the globe.

When the market can shoulder negative news like this it tells me that the bid is still strong. Although I believe that the recovery will be much slower-than-expected, we have to wait for technical support to be breached before we can short. It will take time for this to bear out in the numbers. When people return to work and they will be looking over their shoulder to see if their job is secure. Initially, there will be backlogs to fill. The PPP stimulus will run out in a few weeks and companies might have to lay people off if the new orders aren’t there. Consumers are struggling to pay bills and they won’t go on a spending spree until they can get ahead on their bills.

Earnings season has been good, but it’s important to remember that the results only include a few weeks of the shutdown. Almost all companies have said that Q2 will be much worse than Q1 and most have pulled guidance. Macy’s will delay its report for a month because it has been shut down.

Swing traders bought back the SPY short position yesterday for a tiny loss of $0.68. We just missed getting filled at our limit of $287 early in the day so we covered the position on the close yesterday. We still have some naked put positions and some bullish put spreads that will expire shortly. Buy them back for pennies to release margin and to lock in profits. This week we also bought two longer-term bearish put spreads on weak stocks. Given the market’s resilience during a negative news cycle, I believe that major resistance at SPY $300 will be tested. With interest rates at 0%, Asset Managers are generating negative real returns in fixed income investments and they are forced to own equities. They will error on the side of being long and they are leaning on the safety net (money printing) provided by central banks.

Day traders should try to get long early in the day once support is established. The market has fallen into a pattern where it rallies early in the day and it declines later in the day. I am still finding much better price action on the long side than I am on the short side. Try to make your money in the first three hours of trading and reduce your size and trade count in the afternoon session.

Let’s see if the market can hold the early gap today and challenge major resistance at SPY $300 in the next week or two. Consumer behavior during the next month will determine market direction.
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