Last week in the market we had a ton of economic data.  Everything from housing, manufacturing, GDP, unemployment, consumer sentiment, and finally the FED.  In assessing the strength or weakness of the reports I have found nothing that would lead me to believe that the market would have its worst week in 6 months.

Unemployment: in line with expectations

Consumer Sentiment: increased 81.8

Manufacturing: increased 57.1

GDP: increased to a massive 4%

Consumer Confidence: increases to 90.9

FOMC: held the line with expectations

As you can see, the reports were actually really good, especially manufacturing, consumer confidence, and the GDP number blew out the expectations……and the market sold, big time.  I was in the middle of stock and options work shop teaching some amazing Richdad students how to trade and the market was selling heavy and I had one individual come up to me and tell me she was losing close to 10000 on Thursday alone and asked if I had lost more than her.  I smiled at her and simply stated, not really, thinking about my long put options on IWM and short NFLX.  I tried to explain to her that as a trader I don’t care what direction the market was heading but she simply could not wrap her mind around that concept.  She then started to blame wall street, started talking about how wall street manipulated price action, how they cause bear markets and the typical stuff I hear from consumers who do not understand the price movements in the financial markets.  Her evidence of all of this was the GDP report.  The GDP report was by  all standards an absolute homerun of a report.  In her mind, the market should have went up and it didn’t which means wall street was to blame.

The truth is, the problem is not wall street.  It is the ignorance of the consumer.  I explained to her that the good economic reports had no direct impact on the price action in the market due to the fact the there is no correlation of the health of the economy and the movement in the markets and most importantly, the good economy is a negative due to the FED monetary policy.  With the rash of good economic reports, the FED will be forced to act before they wanted to in increasing interest rates.  If the FED increases interest rates it will suck money out of the markets and trigger a sell off.  Does wall street know this?  Yes.  Do we also know this? Yes.  The only thing that matters is what we do with the knowledge.  While many will blame wall street for their loss of retirement, I do not.  We can do what wall street does but we can do it faster, more efficiently and with less risk.

The thing that amazes me is that in 1 week it erased all the gains the DOW and NASDQ had for the year…one week.

What does it mean for the future.  I am still targeting October/November for a correction in the market with the potential bear market for second half of 2015/16 when I believe the FED will increase interest rates and start to unwind the 4.7 trillion balance sheet.   However, I am making modifications to my portfolio.  There is a concept in the market called delta weighting.  This concept allows traders to determine the weight, balance or ratio of a portfolio simply by tracking the overall delta in a portfolio.

Very Bullish +3:          Account x .007-.01

Bullish +2:                   Account x .004-.007

Slightly Bullish:          Account x .001-.004

Neutral:                        Account x .001-.001

Slightly Bearish:         Account .001-.004

Bearish:                        Account x .004-.007

Very Bearish:               Account x .007-.01

(Bearish Delta is negative)

For the better part of the year so far I have ranged from neutral to slightly bullish which basically means per 100000 you would carry between a 0 to 400 delta in the portfolio.  I often will change weekly depending on my overall read of the week in the market.  Last week I started off the week with a neutral delta as I often do when we have a huge week in the market, on Wednesday I started carrying a slightly bearish delta and kept that for the rest of the week.  Coming into this week given that I believe it will be a technically driven week, I plan on maintaining a neutral delta with a direction position to the short side on IWM which is currently making up a large portion of the neutrality.  I am also using the sell off to potentially get back in some trades such as WLP, ADM, SWKS, LUV and others that are still showing strength.  I will also look to start playing more stocks to the downside since we are finally getting out of earnings season.

Economic Reports: There are only a few economic reports this week and nothing I am that concerned about.

Earnings Reports: There are 80 large cap stocks that report earnings.  The ones I am looking forward to are DIS and GMCR.  For very different reasons.  GMCR is a great VEGA stock which means implied volatility is predictable before and after earnings.  Volatility will rise for 6 weeks prior to earnings and crush after.  DIS interests me due to what they have been doing the past couple years.  Few companies have been expanding their universe like DIS has.  DIS is taking over the world one princess party at a time.  DIS has increase close to 30% in the past year and has started to base.  If the earnings can get it above resistance I see a larger move to around 100 range.

Technical Analysis: the movement in the market last week is concerning due to the breaking of support on short term trends in both the Dow and RUT.  Lets take a closer look at the 4 major indexes

DIA: The dow had already been losing some steam in the last couple weeks with resistance levels slowing down.  The breaking of support levels at 16000 and its 50 day moving average were significant and sparked a sell off that led the DOW to give up every gain it had since the beginning of the year.  Current support is now in the 16300 range with its 200 day simple moving average.  That will be a battle zone the buyers will fight for.  I often see some buying action after a big sell off as some see it as an opportunity to buy cheap and the futures contracts so far are showing a slight sign of strength.

QQQ: The NASDAQ did not sell the same way the DOW did and has held its support level at 4350.  This is an important support area as it is both a prior pivot in March and the 50 simple move average as well.  If the level breaks the next level of support is not until 4174 where the 200 SMA is currently located and under that level at a significant whole number of 4000.  However, the /NQ futures contract is showing a 8 pt gain right now but there is still a long way to go before the open tomorrow.

SPX: The SP 500 is the strongest index currently.  We have recently seen some increasing momentum with a high base continuation formation forming before the sell off last week.  Despite the sell off, the SPX is still above major support levels at 1880.  If I am buying, I am buying SPX companies in the short term.

IWM: this is one index that I am bearish on.  I have been slightly bearish to bearish on the small and mid cap index since may.  Nothing has changed that analysis in the past week.  It is the worst performing index in the market and I believe that will continue.  1090 is major support on both the daily and weekly charts and I expect that to be hit in the near future.  If that level breaks, the next major support is 1000 and that is in the correction range for this index.

 

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