FOMC and Flash PMI’s Could Spark A Round of Profit Taking. I Am Sidelined

Posted 10:15 AM ET - Stocks have rebounded sharply this week and we are within striking distance of the all-time high. The FOMC will release its statement today and Janet Yellen will outline the new framework. We will be "dead till the Fed". Almost every analyst believes that the Fed will reduce bond purchases by $10 billion. Last month's jobs report was much better than expected and growth is stable in spite of horrible weather conditions. Any surprise by the Fed favors the downside. The biggest "fly in the ointment" will present itself Monday morning. Flash PMI's will be released and China will be the focal point. The PBOC is content with current growth levels even though they are slipping. Any further decline will pressure highly leveraged financial institutions. This morning, the Wall Street Journal mentioned that a number of firms are close to default. Individually, these stories mean little. However, they could be a huge warning sign. Traders saw this movie in 2008 and they will adjust risk well ahead of a potential credit crisis. Option implied volatilities have moved off of their lows and they are holding at this level. They are not high by any historical measure, but this is a sign that money managers are hedging risk. Domestic economic releases have been good and pent-up demand should be released as temperatures rise. Corporate profits have also been healthy and we are only a few weeks away from Q1 earnings season. I see a pattern developing and I'm going to get a little technical. If you look at a chart of the SPY, you can see that we broke out in December and we made a new high. A series of small reversals were a sign of exhaustion. The market made a final run at the all-time high and it ran out of gas. Bullish speculators were overextended and the next wave of selling took us down to the 100-day moving average. If this pattern repeats itself, we are very close to a put buying opportunity. The market made a new high in February, we've seen a series of nasty reversals and this recent rally is challenging the all-time high. If this move exhausts itself, we could see a stiff round of selling. I could be way off base, but I don't believe I am. The volume during this rally has been very light. Asset Managers don't feel as if they will miss the next big run and they don't want to chase stocks at an all-time high. Bullish speculation is also high. I'm going to stay on the sidelines. The next round of news has the potential to spark selling (especially the flash PMI's). If the market rolls over, I will buy puts. If it continues to grind higher, I will stay on the sidelines. I won't buy calls until I see a serious wave of selling. This is a low probability trading environment and I suggest staying in cash. We need a breakdown/breakout and follow through. Once we have that, we can jump back in. . .

Daily Bulletin Continues...