Financials Lead Market Lower; Small Caps fend off Sellers

by | May 30, 2018

Distribution struck the major market averages as financials fell more than 3% on the session. Bonds enjoyed gains as the 10-year yield has fallen nearly 30bps since last week. Despite the Federal Reserve Bank set to raise rates again in June Financials are not trading as if a rising interest rate environment will be favorable. Real Estate and Utilities were able to inch out gains, but the damage was done by Financials. The bright side on the session was the ability of the Russell 2000 avoiding major losses like the Dow and S&P 500. There are plenty of stocks still looking good, but distribution piling up may pose a problem for the Market as we head into the summer trading season. We will continue to monitor our risk management process.

Financials are somewhat concerning as the group should be benefiting from higher rates. Perhaps the group is signaling the flattening of the yield curve is going to cause them some pain. The yield curve has NOT inverted, but certainly paying a higher interest rate on deposit accounts then you can loan out will hurt banks. This is all speculation, but given the price action in XLF lower prices are a likely event. Early May lows are in focus as well as April lows. It will be interesting to see the group act over the next few months especially with mid-term elections in November.

We continue to see success with our SPY option day trades. The non-negotiable is you must demonstrate you can make money trading EOD. Proper position sizing and exits must be mastered as day trading requires emotionless trading. If you are unable to prove the ability to cut losses short there is no way you are able to handle the pressure of day trading. Sure, you can try, but we would like to see you be successful and not bleed your account dry. It will happen if you are not a student of this game. You must be able to prove over a reasonable amount of time the ability to cut losses. It is simple conceptually, but so many traders are unable to master and fail at this game. We prefer to see our subscribers succeed rather than lose their account.

Given yesterday’s action it wouldn’t be surprised to see more and more people become bearish on this market. Business Insider continues to publish bearish articles and of course we know what ZeroHedge posts. AAII remains bullish, but if this selling continues we would expect this to change. Best of Luck to your trading!