Equities are in a precarious position but has a benefactor in the Fed, keep trade short-term, recommends Jeff Greenblatt.

If you’ve been following my work the past couple of weeks you know I believe the sentiment for reopening the economy is a big trap. Time hasn’t proven me wrong yet. Numerous states are attempting to reopen but with stiff regulations, it’s going to tough to salvage businesses that must work at 25% of capacity. Since the full rent is still due at the end of the month, that might present a problem.

If you think it’s going to change anytime soon, you are kidding yourself. So, lets connect a few new dots, which will help us read the tea leaves for the months ahead. On May 8, California Governor Gavin Newsom issued an executive order ensuring Californians would exercise their right to vote safely as he directed each county to send mail in ballots for the November election. It will be roughly 20 million ballots. Say what you want concerning the potential for fraud, that’s another column. What he said next was more concerning. Polling places will still be available for those who want to vote in person, but there will have to be social distancing.

That’s basically what he said. This is May, how does he know they’ll still need social distancing six months from now? On Tuesday Los Angeles Mayor Eric Garcetti extended the stay at home order for the next three months, although that is flexible. So, in the best-case scenario, businesses might get to reopen under the same strict regulations the rest of the country is experiencing. Finally, House Democrats are promoting a bill for yet more rounds of stimulus by way of economic impact payments.

What is necessary for an economic recovery? We need to see the sleeping giant wake up. We need to see the big institutions like the political class, media, major corporations, big pharma, sports and entertainment have the will to make it happen. Instead we see the political class picking winners and losers. The big box stores are open, but mom and pop enterprises are the victims of discrimination. If small businesses are forced to operate at 25% of capacity beyond the end of May, many of them will be crushed and gone forever. Given what we see in California and in the House, it doesn’t appear that businesses will be operating anywhere near normal for months into the future. In fact, what we are witnessing is the polar opposite to what should be happening. The handwriting is on the wall.

This doesn’t bode well for financial markets, which have been up on the excitement of the potential reopening of the economy only to see hopes dashed a couple of days later when reality sets in.  The last time the S&P 500 was hovering around the current level was at the top of the 2018 correction (see chart below). Now it has broken an intraday trend channel and is starting to break down. Before bears get too excited this is still a market that is being propped up to the tune of multiple trillions and it be hard to see a bear leg lower in the absence of another black swan event. There is a very high probability trading range that will develop over the summer leading into September, the annual graveyard for stocks. Don’t expect the same kind of mercy we experienced last September.

S&P Index

Given everything going on, the best remedy is to learn how to trade intraday. Each day (and hour for that matter) has a different bias and the patterns are working for both bulls and bears. No two patterns are ever alike but the tendencies are similar. In this case, the Kairos lined up for a bounce at a 75% retracement after a low of 23075 in the E-micro Dow. The E-micro is great for many with smaller accounts and those who don’t want to risk too much in a fast-moving market. In any event when this trade materialized the lower trend channel had not materialized yet. When it confirmed, I simply connected the dots and drew the blue parallel line at the top of the range which turned out to be an excellent indicator the high (see chart below). It also turned out to be a 147-point move in roughly 11 minutes.

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E Micro 

There is still a massive disconnect from what is materializing on the charts compared to the economy. There still isn’t an economy and I’m still hearing people talk like the job losses are temporary. The other day my wife told one of my favorite restaurants closed for good. I like fine dining but there are nights we just don’t feel like cooking. I found out Soup Plantation, which runs Sweet Tomatoes has closed for good. People in the South, Southwest and West have been enjoying their salad buffet and soups for a generation. Due to the buffet nature of their business, 4400 people are out of a job permanently and one must wonder what the future holds for the buffets in Las Vegas (that may be one of the permanent , or at least long-term losers).

Due to Federal Reserve stimulation, the stock market is likely to stay in a trading range. But as far as you are concerned, be a good detective and connect the dots.