U.S. Stocks closed lower on Monday, following through on Friday's losses. We have not seen the Monday follow through to the downside very often in this bull market that began in March. This suggests there is more room to the downside. On the S&P 500, this is major trend line support from the March and July lows at around the 1050 to 1055 level. A breach of that on significant volume should result in a test of the October lows at around 1020.
As mentioned in my earlier post, the main culprit was a strong Dollar. This resulted in an unwinding of the commodity trade, as Gold and Crude Oil were both weak today. The stock market has been propped up by the liquidity injected by the Fed and Treasury since last year. Some better than expected earnings reports added some more fuel to the rally, but it looks like it may be running out of steam. Some companies are now getting hit even when they meet expectations or slightly out perform.
Another issue facing the market, which is propping up the Dollar, is higher interest rates. The yield on the 10 Year Treasury Note settled at around 3.55% today. A further rise in yields will result in multi-month highs. There is a great deal of supply of treasuries coming this week, which could pressure prices further.
The bottom line is that you simply can not have a falling Dollar with rising stocks and rising commodities for very long. Something eventually has to give. One commentator brought to mind the 1987 crash today. That event was preceded by a weak dollar with low interest rates that eventually had to start going up. When interest rates spiked, the stock market collapsed.
Earlier this year, the 10 Year Note approached 4% yields and I believe went above those levels briefly. If you see that again, and they stay above that level for an extended period of time, watch for a big drop in stocks.
As I've mentioned, day traders need to be aware of shorting opportunities in the market now, rather than just focus on the long side.
Scott Cole
www.bestdaytradingstocks.com
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