Morning Market Thoughts
Good morning. We’re in for a rough open this morning, with the S&P Futures down 15, and the Nasdaq futures down 58. This morning, the Labor Department posted a strong number in new unemployment benefits applications. Just 237,000 new applications were filed last week, a drop of 8,000. I’m typically not one to get into economic numbers because of the constant readjustments and revisions. Why fixate on a number when it’s likely to be changed next week or next month? But the trend is important here. An article on Reuters notes that jobless claims have been below 300,000 for 119 straight weeks. 300,000 is seen as the threshold for a strong labor market.So, given the strong employment data, yesterday’s rate hike is likely to absorbed by the market with minimal rebellion. But there are a few wrinkles. The stated reason for the hike was an expectation that economic activity will expand to 2.2 in GDP growth (up from 2.1 last month), though well below the targeted 3% that you hear so much about. But an expanding economy brings inflation, and there are no signs of inflation on the horizon (or in the rear view mirror). But still, the Fed is concerned that it might magically appear.
Such is the way of prognosticators. Make your guess, and then revise it.
Last night, I challenged you to think twice about trading actively in this choppy environment. Tech stock bulls are throwing a fit, with $FB, $AMZN, $AAPL and $GOOGL trading on the low end of a wide range carved out from Friday’s high and Monday’s low. ($NFLX is also in that group, but it’s flirting with falling out the bottom. Several of these stocks have been downgraded recently. And when high flying, mega cap stocks like GOOGL or AAPL are downgraded, you have to pay attention…particularly when they are near all time highs. The usual pattern is for analysts to downgrade popular stocks after they’ve cratered. They are rarely early. They are often late.
Understand that stocks move in cycles. Uptrending stocks tend to advance within identifiable uptrending slopes, and they then rest in sideways clusters. Depending on the stock, these sideways clusters can be orderly and tight (i.e., volatility squeezes), or they can be chaotic and wide. When they are orderly and tight, a way to view an orderly and tight volatility squeeze is to see it as an agreement on price between buyers and sellers. There’s no extreme difference of opinion. The stock is sleepy (see AMZN in March). But when they are chaotic and wide, they reflect a war going on between bulls and bears. There is a huge disagreement over price, and the frenetic selling and buying creates a wild and unpredictable range. That’s what we’re seeing now.
During these times, it’s best to either withdraw, or set very strict rules for position size, and only take action when prices hit an extreme border of the existing range. If you can do that, then you’ve got minimal money at risk, and a greater chance of profit.
My current take is that the tech wreck is a sign of a trading top. It’s summertime, and volatility tends to pick up as a result of lighter volume. There are always opportunities to make money. You just need to be disciplined to avoid gambling.
See you in the trading room.
–Dan
(Which was downgraded from
Market Update