Market Pullback Likely – Asset Managers and Shoppers Will Wait For Lower Prices

Posted 9:30 AM ET - On the eve of November option expiration, China lowered rates for the first time in two years. The market spiked to a new all-time high and it has not been able to advance since then. Prices have compressed into a tight trading range and volumes have declined. I mentioned last week that stocks tend to rally into Black Friday and decline on Cyber Monday. The S&P futures are down eight points before the open. As outlined, I sold the last of my calls on Friday. My position is very neutral. I sold out of the money put credit spreads a few weeks ago and last week I sold some out of the money call credit spreads. I also bought a few puts (5% of my Max allocation). I am positioned for a choppy week with a slightly negative bias. Black Friday sales were down 11%. This should be concerning, but I'm not worried. Retailers have been discounting prices for years. Shoppers know that they will still be able to get great prices right into the holiday and they are postponing purchases. I believe that Asset Managers have the same mind set. They will not chase stocks at an all-time high and they are not worried that they will miss the next big run. Asset Managers will also postpone purchases and they will wait for better prices. Bullish speculators should be getting nervous. Anyone who bought the breakout is leaking oil. One small pullback could shake them out of their positions. Asset Managers will pull their bids and we could hit a small air pocket. I believe the SPY will test the breakout at $204 this week. If it holds, that will provide a nice re-entry point. If that breakout fails, we could see a nasty slide. We caught the entire snapback rally and we have fantastic profits. It would be stupid to risk them for another 1 to 2% of upside. Take profits on your long positions. Official PMI's in China and Europe were a little light. Japan's credit rating was downgraded by Moody's, but that news was negated by an upward revision to Q3 GDP. Now it appears that it will come in flat versus a decline of 1.6%. Central banks have been easing like mad. It's important to remember that they are doing this to counter weak economic conditions. They've already thrown the kitchen sink at the problem and they are out of bullets. In Europe, interest rates are already in negative territory. Oil continues to decline. This is good for consumers and corporations (lower input costs), but it could raise sovereign credit issues (Russia, Brazil and others). US economic conditions remain strong. Corporate profits were excellent and stocks are still attractive relative to bonds. I believe that China is the key to a year-end rally. If the PPOC acted because it sees weakness, we could be in trouble. If activity remains stable and the liquidity injection was used to avoid a holiday cash crunch, the market will grind higher into year-end. I don't know how this is going to play out so I am hedging my bets. Seasonal strength will keep a bid to the market at lower levels and profit-taking should keep the highs intact. We should see choppy price action the next two weeks. If you only buy option premium, you should be out of your call positions and in cash. Look for early weakness and support at SPY $204 . .

Daily Bulletin Continues...