Ever since the market gapped lower last Thursday morning the lemmings are getting increasingly nervous with every rally an opportunity to sell. That puts a whole new spin on the 'market can only go up' axiom of the past month.
The question is–do stocks have a whole lot more downside to run, or are we ready for a rebound?
To help answer that question let's take a look at…
The Markets and How They Affect Us
This weekly chart does a good job of showing the range for the past 2 years–and as you can see there is plenty of downside potential…
As you can see from the chart above the SPX has had a tough week–but with little support immediately below chances are good this downside is just starting. There are plenty of reasons traders are becoming cautious so even if we see a slight rebound this selling isn't likely over.
The last couple of months complacency is evaporating. Investors are moving to the sidelines ahead of the Fed and the Brexit vote. The Fed announcement should cause some market volatility, possibly in both directions, however nearly 100% of analysts surveyed do not believe the Fed will hike tomorrow. They list the jobs report (55%) as the number one reason, slowing global growth (15%), Brexit (13%), market expectations (5%) and other causes at (18%) as the additional reasons the Fed will not hike.
The Fed announces at 2:00 ET tomorrow afternoon–but that hurdle will barely be cleared before the vote on the British exit from the EU commences next Thursday.
A new UK survey showed 55% of prospective voters favored leaving the EU while only 45% wanted to stay. This is the biggest percentage spread in favor of leaving and the tide is turning in their favor. The vote on June 23rd is a flashing warning signal on investor calendars, but I suspect most really do not have any idea what will happen after the vote.
The vote itself is nonbinding. However, it will express the will of the people and the lawmakers will begin the process to leave the EU if that is how the vote plays out. The UK will have to file an "Article 50" request to exit the EU. That starts a two-year countdown clock that will give officials both in the UK and the other EU countries time to begin making plans for how they will handle business with the UK after their exit.
The UK leaving the EU is not the biggest problem. The problem will be other countries also planning their exits. France and Italy have already expressed a desire to go back to an independent status. Italy is suffering from the EU rules and wants to go back to its own currency (Lira) and abandon the Euro. Wage and cost inequality between all the Eurozone countries makes it difficult for some countries to compete, while others have become trade powerhouses.
Meanwhile here at home the economy continues to weaken. The CEO from Capital One warned earlier this month that default rates are rising. JP Morgan's Jamie Dimon warned that credit problems "are going to get worse." More than 31% of the subprime auto loans written over the last 3 years are in trouble. Revolving credit rose to $951.5 billion at the end of April. All the banks and credit card companies saw their shares decline today.
Meanwhile the commodity that has been leading the markets higher–oil–is suddenly in trouble. The API crude inventories after the close showed an unexpected rise of +1.2 million barrels for the week ended last Friday. Analysts were expecting a decline of -2.3 million barrels. Crude prices had closed at $48.47 with a decline of 41 cents. After the API news, WTI fell to $47.72 in afterhours–nearly a 4-week low. The real inventory number to watch is the EIA number at 10:30 tomorrow morning.
The bottom line is we are likely to see some sharp up-and-down action over the next few days, but the chart above and current circumstances tell us it will resolve itself to the downside–the question is…
How Do We Make Money on It?
Both the fundamentals and now the chart tells us the market is in trouble and likley headed lower. For that reason we're going to stick with call spreads as the most dependable–and in this case generous–way to make money.
Our first trade is a call spread on an index that had been trending strongly higher, but rolled over hard over the past 4 days. Now it looks ready for a rebound which could net us a quick 10-day 25% gain.
And for our Roth Retirement trade we're looking at a FAR out-of-the-money call spread for a conservative 10-day 28% profit.
We've got two good looking trades lined up to take advantage of the market at hand–so let's get started…
Click here to gain access to today's picks.
Keep up the good work,
Peter