Hey 5-Star Trader,
Similar to the majority of September, October market sentiment has looked weak so far. We opened the week with choppy conditions and saw some major moves to the downside. I believe there are several compounding factors that are contributing to this behavior.
Covid-19 has changed a lot about the world and it has been a tough time for many people. One thing the government has done to try to help was offering stimulus packages. Now, we are starting to feel the long-term effects of these relief packages with rapidly rising inflation. This inflation is causing fear and it can be argued that it is a factor in driving down the market.
Additionally, many retailers — including large chains such as Costco (COST) and Nike (NKE) — are experiencing supply chain issues. These problems are affecting daily operations and their bottom lines are being compromised which is another disruptor to the market.
Another huge influencer of the market is the Federal Open Market Committee (FOMC) and their leader, Jerome Powell, will be up for reelection at the beginning of next year. Rumors are beginning to float around that he may not keep his position. If he were to be replaced, that would be a huge change for the FOMC and the new appointee could shake up the way things are done. For now, the outcome of next year remains a huge unknown, which is making people nervous, therefore exposing another contributing factor to a lame market.
All these factors combined on top of the fact that October can be seasonally weak, I’m not completely surprised to see how the first full week of the month has shaken out so far.
How does this affect my trading?
Earnings season is right around the corner and we are quickly entering the “run into earnings” phase. Typically during this period of time we see the market rally. However, this time around we are seeing a lack of excitement. If conditions don’t change soon, I’m predicting a lackluster earnings season which might deter me from putting on as many earnings trades as I would normally like.
These down days are also detrimental for long-term options contracts. As a directional trader, I like to set my expirations two or three weeks out but current market conditions are not making that option favorable. Instead, I’ve had to adjust for shorter-term trades. These trades are inherently riskier because there are fewer days left until expiration for my trade to correct itself if the setup doesn’t go how I want it to.
What should I do now?
As a general rule, you should always exercise care when trading, but now is the time to use extreme caution. October has taken its first fall and now we are at a crossroads. Will we be able to recover? Or will we fall even lower? We are in a delicate position and one false move could easily spook the market even more than it already is.
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