"Let me tell you something my friend. Hope is a dangerous thing. Hope can drive a man insane."
- Red in The Shawshank Redemption by Stephen King
Friday is all about hope. We hope Gilead (GILD) has the answer to help society avoid overcrowded hospitals, lower the Covid-19 mortality rate, and open back up the economy. We hope Boeing (BA) resuming commercial airline production in Washington and putting 27,000 people back to work is a sign to come. No matter if there is no one to buy planes right now because flights are essentially grounded, but we hope that changes soon too. We hope the bottom in equities is in and a bull market back to new highs is well underway. Wall Street banks sure as heck hope so since many big names have put their stamp on the fact the bottom is in and stocks will be at new highs in 12 to 18 months.
This hope had the SPDR S&P 500 ETF (SPY) hitting $289 in the after hours last night as futures tore higher. A combination of hope and options expiration spurred FOMO (fear of missing out buyers) and squeezed shorts who may have been sitting on naked calls into today.
But I hope we aren't ahead of ourselves here because we've hit a major crossroads on two fronts: the markets and society.
Let's start with the market. The SPY gapped high today right into the 50-day simple moving average (SMA). Last night, I tweeted the bears would be in trouble if we gapped open above the 50-day SMA. Go take a look at the (QQQ) daily chart if you want to know why. Unfortunately, bulls couldn't get it done, so while the market is still higher by 1.5%, we're actually seeing strong selling off based on "good" news and hope if you consider both last night's highs and today's open. We've seen nothing but buying for a month now, mostly on negative news. If we are leaving the cycle of bad news and the market is choosing to sell good news, then I would anticipate the next 5%-7% is lower.
Bulls needs to get the SPY above $285 in my opinion. We're already oversold on the Full Stochastics for more than a week and threatening to break lower. Volume has been on the steady decline over the past month as well. Let's not forget this is the first true test of the 50-day SMA in two months. There's been a ton of empty space between the 50-day and price, so the first test is unlikely to succeed.
If you've been riding high or looking for an opportunity to short, I think your short-term reward outweighs your risk right now.
From a societal standpoint, treatments and cures are more than hope, but the idea that a treatment is something more than a treatment and a political push to paint a hopeful picture all combined with a market roaring higher could create an overly optimistic return to days of yore. It could result in a rapid collapse of social distancing because of overconfidence, which hope can morph into quickly. That's what makes it dangerous. We also know in trading, hope is not a strategy.
We're at a crossroads and today's close is going to be huge. Just to add a little more challenge, it's options expiration, but I'm going on record here with strong words of short-term equity caution if we can't close above $285 on the SPY.