Bears took a break from clobbering buyers, but their gentle gesture is unlikely to persist, states Jon Markman, editor of Strategic Advantage.

Strategic Insight

One day after bulls got punched in the mouth, trade on Wednesday was almost a non-event. The S&P 500 (SPX) closed at 3,946, up only 0.3%. That’s not a huge win for bulls considering that the benchmark index lost 4.3% the previous day.

On the other hand, bears did have the opportunity for the knockout, and they demurred. My bet is a slight bounce will happen today, Thursday. That doesn’t mean bulls are back in the fight, though.

Bears still have control of the 50-day moving average of the S&P 500, which now stands at 4,040. Expect them to reload short positions on any rally to that level. Also expect that bulls will ultimately concede a decline to 3,792. That level represents the July 15 gap.

In the interim, bulls are like a dazed boxer hanging onto his opponent and gasping for air. Right now, survival is a victory of sorts. However, bears are in control. There is important support for the S&P at 3,792, then 3,640, the June low. Use strength to add to bearish bets.

Strategic Trade

The order on Wednesday to initiate a bearish bet against the S&P 500 did not fill. Make the following change: Place an order to buy the ProShares Ultra Short S&P 500 (SDS) at $44.20 lmt gtc. If filled, set target to sell all at $50.10 and set a stop at $42.80 stop. If this trade works, the potential upside target is +13.8% and the potential downside loss is -3.2%.

The Backstory

The Dow Jones Industrial Average (DJI) finished 0.1% higher at 31,135.09, the Nasdaq (IXIC) gained 0.7% at 11,719.68 and the S&P 500 rose 0.3% to 3,946.01. 

Energy was the biggest gainer among the sectors while real estate and materials were the worst performers.

Breadth favored advancers four-three, and there were 52 new highs vs 402 new lows. The leaders were Cigna (CI), Corteva (CTVA), Cheniere Energy (LNG), Albemarle (ALB), and EQT Corp (EQT), a motley crew.

The ten-year yield fell 1.1 basis points to 3.41%. The two-year rate climbed 4.1 basis points to 3.80%. West Texas Intermediate futures jumped 1.7% to $88.77 a barrel.

The producer price index fell by 0.1% in August following a 0.4% decrease in July, in line with the 0.1% decline expected in a survey compiled by Bloomberg. After excluding the more volatile food and energy prices, core PPI rose by 0.4%, above the 0.3% gain expected and following a 0.3% gain in the previous month.

This "minimal improvement" won't be enough to shift sentiment to expect a 50-basis-point increase in the Federal Reserve's policy rate, though it should ease the pressure for a 100 basis-point rise, Stifel Nicolaus Chief Economist Lindsey Piegza said in a note Wednesday.

In company news, steelmaker Nucor (NUE) said it expects fiscal third-quarter earnings per share of $6.30 to $6.40, compared with $7.28 a year earlier. Four analysts polled by Capital IQ forecast $7.59. Shares of the company slumped about 11%, the worst performer on the S&P 500.

Moderna (MRNA) has had discussions with the Chinese government to provide its Covid-19 vaccine to the second-largest economy in the world, Reuters reported, citing Chief Executive Stephane Bancel. Shares jumped 6.2%, the biggest gainer on the Nasdaq 100.

Learn more about Jon Markman here...