Market Insights: Friday, June 7th, 2024.

SPY opened down $1 on stronger than expected Non-Farm Employment data which not only showed close to 100,000 more jobs added than forecast, but also rising wages. While the Unemployment rate ticked up to 4%, it is still quite low by historic standards. The Federal Reserve wants the job market to weaken to reduce demand which in turn will reduce inflation…in theory. A strong labor market with rising wages will not weaken demand and as such, we should expect interest rates to remain higher for longer. Earlier in the week ADP had a different employment picture which highlights how unreliable these reports tend to be. While the market initially sold off on the news, it found support at $532.50 just after the open, then rallied to resistance at $536 where it sold off to $534, only to rally once again to a new all-time high of $536.89 by 1:30 pm ET. The market finally decided good news was bad news and sold off into the close to settle at $534.01, up just 12 basis points. The Nasdaq lost a bit, falling 11 basis points after making a new all-time high, while the Dow lost .22% with the Russell dropping 1.17% given small caps rely more heavily on financing and therefore their earnings are more susceptible to higher interest rates. Volume for SPY was 42.71 million shares, a respectable number for June.      

As might be expected, 10-year Treasury yields jumped sharply, gaining 3.38% to close at 4.434%. Technically Treasury yields want to fall, but due to an oversupply of paper needed to be sold, yields will continue to rise longer term. Crude fell .51% still trading in the mid $70’s while Gold fell sharply 3.56%, falling below $2300. We are buying these dips in Gold and Silver. Bitcoin also fell 2.50%, closing below $70,000, yet we are buying Bitcoin on any pullback above $60,000.   

In Thursday’s newsletter, we continued to reiterate our model remains bullish and we expected the market to move higher heading into today, but to be cautious early on due to this morning’s economic report. We stated we expected today to have a fairly wide range with two-way trading and to adjust our model’s predictions based on the market reaction to today’s report. We stated the market could make new highs on favorable employment news or could fall and test yesterday’s lows at $532.50. And the market delivered on both fronts testing and bouncing off yesterday’s lows to the penny, then rallying to new highs. We have stated all week to expect new highs and certainly our model delivered the goods perfectly. Our model routinely predicts the day’s market structure (ranging or trending), the direction of the market and levels to enter and exit trades. Fail to use this information at your own risk.

In the premarket at 8:24 am ET we stated while the market made a new high yesterday, it was possible the market could reach $537 today, although it was somewhat unlikely. We stated we expected some downward pressure early in the day and that losing $533 would lead to a deeper sell off. We suggested shorting $535 which presented several times today. And while the market briefly dipped below $533 just after the open, we identified this as an area of support which if held, would be a good long. We have advised all week to buy dips and to trade them to new highs. To determine if a level will hold, we look for rejection and confirmation of a level before determining if an entry is warranted. For example, to determine if you should have shorted or bought $533 today, look for price to trade through this level to the downside and come back to retest it. If the low made on the initial break holds, go long. If this low fails on the retest, go short. Today the low of $532.54 made on the initial break of $533 held so our clients knew to go long. Once again, combing the post and premarket reports provided levels to trade with a directional bias. Use this information to create a plan of attack for the day so when you do trade, you have confidence in your decisions. If you need further assistance, seek out your representative.          

We continue to reiterate we remain bullish above $518 while below $530 the model will likely experience profit taking which will initially see $525. Any failure of $525 will retest the $518 level. While we are now at another new high in both the S&P and the Nasdaq, and while the market still has room to run in the bull trend channel that has been in place since the April lows, the market is tired and within a week, will be entering a quiet, summer period. But next week there are multiple economic releases including CPI, FOMC, and PPI. Next week will have plenty of fireworks to move the markets one way or the other. In addition, NVDA’s stock split will take affect and given NVDA alone is responsible for 35% of the S&P gains this year, perhaps the market starts to show some weakness rather than strength in the coming months. Our models believe we will see $540 on SPY before any significant weakness develops.

Looking at a chart of SPY with our Market State indicator, the indicator is currently in a bullish trending market state, rescaling several times today up and down in fairly rapid succession. Clients who utilize this valuable tool understand when the indicator rescales intraday with higher highs and higher lows, to expect a strong trend. But in a day like today where it rescalled higher, lower, higher, lower, etc..this is telling you the AI is uncertain of what is coming next. Uncertainty is the hallmark of a trading range so watching this play out today provided plenty of clues to expect higher prices but only slightly, and to be sure to take profits and even take mean reversion shorts at the upper blue resistance lines. Once again, the indicator provided every significant level today in real time and made it quite easy to have a profitable trading day. Presently, the indicator is still bullish and trending with price sitting mid-range. It would not surprise us to see tests on Monday of $532 and $536.50. Having this AI powered tool in your toolbox can surely provide actionable information for traders of all types. For more information, please contact your representative.

For Monday our model projects prices will trade between $530 and $538 (white box on chart), narrowing slightly which implies the likelihood of more range trading on Monday. Support is $532 with resistance at $537. The late day sell off will likely continue heading into Monday morning with the market testing $533 and perhaps $530. But we are bullish and recommend buying this dip as its very possible the bull trend resumes Monday afternoon. Monday does not have any economic news so we expect a consolidation day with sideways price action and believe our Market State Indicator will rescale to reflect that sometime Monday. But for an update be certain to check the Premarket Market report for updates to our model’s predictions.

Dealer positioning for Monday to the upside has Dealers selling $537 and $538 and higher strike Calls, while also buying $535 and $536 Calls in slightly smaller size. This certainly implies Dealers expect new highs on Monday, with a ceiling of $538. To the downside for Monday, Dealers are buying $534 to $532 and lower strike Puts in a 3:1 ratio to the Calls they are selling. This implies should $533 give way, they expect prices to fall more significantly, again in line with our model’s predictions. 

Looking out to next Friday, to the upside Dealers are selling $534 to $541 Calls in some large sizes implying a max high for the week of $541. Even with the significant economic news being released next week, Dealers are confident the market will not exceed $541. To the downside Dealers are buying $534 to $515 Puts in huge quantities, heavily positioned for a more material sell off by Friday. Based on this positioning, should $530 fail, Dealers believe the market will trade to at least $525, again levels we have identified. Dealers seems to be more concerned going into next week than they were this week, implying while we may very well see $540, there is also a high likelihood the market could then enter a correction phase and sell off more materially. We highly recommend you purchase protective Puts for any long book.  

But Dealer positioning changes each day so be sure to check our Market Sentiment Newsletter premarket and review these post-market recaps to understand how dealer positioning will affect the day’s price action. Pre-market analysis is posted by 9:15 AM and these post-market recaps are posted each evening. We strive to deliver actionable intelligence you can use each day in your trading. Good luck and good trading.