Bank Losses and Credit Concerns Will Weigh On the Market. Econ Numbers Will Be the Real Test

This week, the market tested the100-day moving average. Buyers stepped in and stocks rebounded. Today, we will test that support again. After the closing bell, JP Morgan stated that they will take a $2 billion trading loss. There could be an additional $1 billion in losses by the time this runs its course. The news sent a shockwave through the market and the S&P dropped 10 points. JP Morgan is not alone. Credit Agricole (third largest bank in France) reported that it will take $1.2 billion in Greek write-downs. It is trying to prepare itself for a Greek default even though it said that scenario is unlikely. In four weeks, Greece will hold elections. If existing politicians can't form a coalition, and extreme leftist candidate (Communist) will win. He does not support the bailout agreements and he will immediately send Greece into default. This will weigh on the market if current politicians can't form a coalition. Spain's banks are also in dire straits. One of the largest banks was nationalized this week and Spain is trying to form a "bad bank" where toxic assets can be parked. In theory, these assets will recover and the government can unwind their positions in the future. The maneuver will provide the banks with much-needed breathing room. Unfortunately, Spain does not have a strong enough balance sheet to shoulder these losses and it will need bailout money. Italy will hold bond auctions next week. Their interest rates have remained relatively stable and this should not be a major obstacle. The bigger issue will be economic releases. Economic activity in Europe is slowing dramatically. Germany has been the cornerstone of stability and its PMI dropped to 46.3 last month. That was much worse than expected and they will release Q1 GDP next week. Watchmaker Fossil said that European retail sales will decline this quarter and that sent a shockwave through the market this week. Any company that does a substantial amount of business in Europe pulled back. Strength in China could save the day, but that is becoming less likely. This week there trade balance came in light. Overnight they reported that factory output grew 9.3% versus 11.9% last month. This number missed expectations. Furthermore, retail sales grew 14.2% and that was also less than expected. The good news is that China's inflation came in at 3.4%. That was .2% lower than last month and it should pave the way for easing. The Peoples Bank of China has hinted that it will lower bank reserve requirements. One potential issue is that food prices were up 7%. This makes up a large percentage of their discretionary spending and it could curb consumption. India reported that factory output declined 3.5%. That was the first drop in five months. US economic releases have been soft. Fortunately, initial claims have declined and stabilized for two weeks. There are many releases next week and they include retail sales, Empire Manufacturing, housing starts, industrial production, initial claims and the FOMC minutes. Last week ISM manufacturing improved slightly and that might bode well for manufacturing releases. In aggregate, this news should be neutral. Credit concerns are back in focus and the bank write-downs will not help matters. Traders will keep a close eye on developments in Greece and Euro interest rates. Dismal economic releases in the Euro Zone next week will also weigh on the market. The news from China has been decent, but it is not good enough to offset what is happening in Europe. The market will test support today and I believe it will hold. The news from J.P. Morgan can be isolated and prices should stabilize early in the day. Next week, the market will have to deal with additional bad news and I believe the 100-day moving average will fail. Stocks are attractively valued and once support is established there will be an excellent opportunity to sell out of the money put credit spreads. I am not ready to establish those positions yet. I still believe we have more work to do on the downside. The price action is very choppy from one day to the next and I am day trading to reduce overnight risk. Financial stocks have rolled over and there will be nice shorting opportunities in that sector today. They have run up this year and profit-taking will set in. Look for early selling today and support at the 100-day moving average. If by chance that support fails and we hit an air pocket, I will buy a handful of puts and hold them over the weekend. . .

Daily Bulletin Continues...