Stocks waffled all session before deciding to close near the lows, notes Jon Markman, editor of Strategic Advantage.
We sold our timing model position in a double-leveraged PowerShares QQQ Trust Ser 1 (QQQ) ETF for a neat 2.9% gain following a four-day hold. Now look for a potential pullback for the S&P 500 (SPX) to support at 4,175. If that happens, bulls are likely to reload and make a new assault on resistance at the 200-day average.
Observations
Bears finally got a win on Wednesday as the S&P 500 was repulsed from the 200-day moving average at 4,325.I’m not surprised. The bears had to step up there. Bear markets live below the 200-day marker. Losing that level on a close would destroy the bearish narrative about the eight-month downward trend.
The 0.7% decline to 4,274 takes out the previous intraday low at 4,277 and facilitates the argument that the bear maker rally from the June lows is now complete.
Expect the usual parade of bearish investment strategists in the coming days to spread theories about stagnant economic growth and high real rates of inflation. It will be interesting to see how this plays out with pro-money managers. Most are trailing the unmanaged S&P 500, and they need a win.
I’m betting that they will be lured back into the market on any decline to the recent breakout at 4,175. If that level holds, and I suspect it will, bulls are likely to make another run at the 200-day moving average in early September.
Overhead resistance for the S&P 500 is still 4,325. Critical support is 4,175.
SA TradeView
Our position in ProShares Ultra QQQ (QLD) was sold at the open Wednesday on stop at $56.30. The entry was $54.70 on August 11. Our gain for the four-day trade was 2.9%. Not too shabby; that annualizes out to a +130% gain.I’m not bearish but want to point out that a decline to $53.00 over the next several days is possible. It makes no sense to let a profitable trade turn into a loser. Wait for the next setup.
The Backstory
The Dow (DJI) fell 0.5% to 33,980.32 and the Nasdaq (IXIC) declined 1.3% to 12,938.12.Communication services was the steepest decliner among sectors, with all but one sector, energy, in the red.
Breadth favored decliners seven-two, and there were 73 new lows vs 90 new highs. The leaders were Pepsico (PEP), Automatic Data Processing (ADP), The Southern Company (SO), Northrop Grumman (NOC), Waste Management, and Progressive (PGR). Though tech is not at the front, it’s still good leadership.
In data land, we learned that the Fed determined at its meeting last month that it would keep increasing its benchmark lending rates until inflation came down substantially and use incoming macroeconomic data to decide the extent of the rate hikes.
In a bid to combat red-hot inflation, the Federal Open Market Committee has raised the interest rates at each of its meetings since March, including two consecutive 75-basis-point increases in its last two meetings, with more increases expected in coming meetings. However, despite the measures, inflation continues to remain at elevated levels.
US retail sales were flat in July, below a 0.1% increase expected in a survey compiled by Bloomberg and after a 0.8% gain in June. However, excluding a 1.6% drop in motor vehicle sales, retail sales rose 0.4%, compared with an expected 0.1% decline.
"American consumers are spending more but buying less, as high inflation gobbles up purchasing power," BMO Capital Markets Senior Economist Sal Guatieri wrote in a note. "Sales were dragged down by sagging gasoline station receipts and lower sales at auto dealers."
In company news, Agilent Technologies (A) lifted full-year sales and earnings guidance as orders continued to outpace revenue and the outlook improved amid a faster-than-expected recovery in China. Shares jumped 7.2%, the most on the S&P 500.
Zoom Video Communications (ZM) shares fell 6% after analysts at Citigroup downgraded the video communications company's stock to sell from neutral with a $91 price target, the worst performer on the Nasdaq 100.
The Portfolio
Daily Results: Our Digital Transformation list declined by 0.8% on Wednesday.…We added Netflix (NFLX) shares back into our list at $208.17 on July 20. It still looks good for new money as it heads to close the gap at $350.…We will have more recommendations soon.
Our Other Letters: In our Tactical Options letter, we sold Walmart (WMT) Sept $140 calls for a gain of 48.5% after an overnight hold….In our Counterpoint Options newsletter, we sold our August fifth and August eighth positions in S&P Biotech SPDR (XBI) August $85 calls for an overall gain of 60% today, which was awesome.
