How to Play Stock Gridlock

The countercurrents affecting stock prices today… two catalysts that could start a larger move… a free resource for learning how to profit from a range bound market

Get ready for a range bound stock market.

That’s what our technical experts John Jagerson and Wade Hansen say Strategic trader expect for the near future. Fortunately, they have advice for investors on how to play it.

Behind this stalemate is the loose balance between bullishness driving stocks higher and bearishness pulling prices down.

Three dynamics support stocks…

First, there is this week’s rally. While it’s been a stop-and-go, the S&P is up 3.8% this week as I write this early Friday afternoon. John and Wade see this as evidence that buyers are looking for good deals and that investors aren’t too concerned about another significant drop just yet.

Second, the level at which the market started its rally was positive. It was at a critical support level for the S&P near 3,590. This shows that there are still enough buyers to prevent a significant crash right now.

Third, John and Wade point to earnings that are coming in better than many feared.

Here they are with more:

As we’ve been saying for a few weeks, third quarter earnings should come in better than expected and as long as consumers continue to spend, the floor under stock prices should remain strong.

So far, the earnings season has been going like this.

On the other hand, there is a very strong bearish influence weighing on the market

Uncertainty.

Let’s jump to the latest Strategic trader To update:

Although things are looking positive so far, we have yet to moderate our expectations; It’s rare for a sustained bullish rally to start with major reversals like last Thursday.

This tells us that investors are uncertain, and uncertainty is usually priced into market prices.

The negative factors weighing on the economy (inflation, rising interest rates, a slowdown in the global economy) are still severe enough to keep uncertainty high in the short term.

In our view, the positives and negatives are balanced enough at this point to keep the market stable, but will also prevent any large upside moves.

We expect major indices to remain channel-locked in the short-term.

If you want to trade this channel-locked market, John and Wade see resistance at 3,800. But if the bulls muster the strength to break this level, expect some heavy selling pressure at 3,900 that should at least temporarily halt a rally.

On the downside, we have clear support around 3,590.

The two potential catalysts that could lead to exaggerated market movement

The first big game changer for stocks will be tech earnings.

Tesla disappointed investors after the closing bell on Wednesday. The electric vehicle giant beat profits but missed sales. However, CEO Elon Musk was very optimistic:

I can’t stress enough that we have excellent demand for Q4 and we expect to sell every car we make as far into the future as possible. Factories are running at full speed and we ship every car we make and keep our operating margins strong.

It wasn’t enough for Wall Street. As of this writing, the stock is down about 5% since the close on Wednesday.

IBM did a better job of satisfying investors. The tech veteran beat on earnings and revenue and raised its full-year growth outlook. It’s up about 6% since the report.

But yesterday came more weakness. After the bell, Snap reported disappointing earnings from advertiser spending cuts. The stock is down 31%.

The real tech fireworks come next week when Microsoft, Apple, Alphabet and Amazon report.

Back to John and Wade on what to look out for:

We expect tech companies to bag a sandbag (lower forecast so next quarter will be easier to beat) during their earnings calls.

We expect companies will be right to point to a strong dollar and slowing international demand as the cause of slow growth rates this quarter, but whether they believe these trends will continue will be the key drivers of investor sentiment.

Speaking of dollar strength, the US Dollar Index is nearing 113, just a hair below the decade high of around 114 it hit a few weeks ago.

The second potential catalyst John and Wade are watching is the Fed

For now, another rate hike on November 2nd appears to be a deadlock. However, what is unclear and leaves the door open for market fireworks is the Fed’s comment.

Back to John and Wade:

We don’t know what the Fed Chair and other governors will say about the rate hike – and the pace of future rate hikes at this point.

FOMC members recently said there will be some debate over whether rate hikes should continue in 2023 at the same pace as in 2022. However, that was ahead of the latest CPI report, which beat expectations.

As a result, many traders and analysts are concerned that Fed members may start adopting a more hawkish tone with less “debate,” which is bad for stocks.

But an unexpected pigeon attitude is not excluded.

In fact, this morning there is some reluctance behind why all three indices are up so much as I write this (Dow up 1.8%, S&P up 1.6% and Nasdaq up 1.4%).

In short, some Fed members want to slow the pace of rate hikes The Wall Street Journal:

Some officials have begun signaling their desire to both slow the pace of rate hikes soon and halt rate hikes early next year to see how their moves this year slow the economy. You want to reduce the risk of an unnecessarily severe slowdown.

Others say it is too early for these discussions as high inflation is proving to be more persistent and pervasive.

You might not think this is exceptionally dovish, but if we look at CME Group’s FedWatch tool, traders yesterday estimated the probability of a 75 basis point hike in November at 99.9%.

As of this writing, it’s down to 91.7%.

If markets finally start pricing in a hawkish Fed, but the Fed isn’t quite so hawkish, an explosive rally could begin.

We shouldn’t bet on that – especially not in November. But as the WSJ points out, we are beginning to see some calls for a more measured approach to rate hikes.

At the moment, however, there is a well-entrenched hawk for every budding pigeon. With that in mind, here is Minneapolis Fed President Neel Kashkari as of Tuesday:

If we don’t see any progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5 or 4.75 or something like that.

As a reminder, the target range is now 3% to 3.25%.

As for John and Wade, they believe the Fed will stand by recent signals. But this is probably the most significant joker for the market today.

Here is John and Wade’s verdict:

In our view, the negative and positive aspects of the market are roughly balanced.

Traders usually like clear black and white answers, so this can be awkward. If the wild swings in the market make you feel a little frustrated, you’re normal.

We plan to continue using strategies that perform well in a channeling market. That means selling calls at resistance levels and buying them back or writing short puts on the lows.

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In the meantime, we’ll keep you updated on the latest tech and Fed results here in the Digest.

Have a nice evening,

Jeff Remsburg