Possible Shorting Opportunity Ahead of News. Watch For Late Day Weakness

July 9, 2013

After a major round of economic releases last week, the market is in rally mode. We are reaching the upper end of the trading range and the headwinds will be stiff. The recent move higher has come on extremely light volume and I don’t trust it.

The news has been mediocre. Employment was better than expected, but most of the gains were contained to low-paying jobs. Part-time work also padded the number. ISM manufacturing and ISM services were both soft last week. The US is strong relative to global economies and we are only growing at a rate of 1.8%. The sequester has yet to run its course and we can expect 2% growth (at best).

Emerging markets are slowing down and so is China. The EU is dismal and after six consecutive quarters of negative growth, there are not any signs of improvement. The IMF is likely to lower its global growth projections in the next few days.

Tonight, China will release industrial production, GDP and retail sales. Activity has been slipping and there is a good chance that the results will disappoint.

Tomorrow, the FOMC minutes will be released. After the close on Wednesday, Ben Bernanke is scheduled to speak at an event. This news will not spark huge selling, but it will weigh on the market.

Interest rates have already moved higher and the market is gradually getting used to the change.

Earnings season has started and Alcoa did not generate much of a reaction. Pre-announcement warnings have overwhelmingly been negative and the ratio is 5:1. Almost 20% of the S&P 500 companies have warned.

I like financial stocks, but good news is priced in. If you look at major banks they are trading near their 52-week high.

We are at the upper end of the trading range and given the pending news, I am looking to get short. We established an early high this morning and we backed off from it. Now the market is challenging that level a second time. If it gets turned back again, we could see late day selling. That reversal would lead to follow-through for the next few days.

I’m not worried about earnings from Chase or Wells Fargo Friday. The expectations are high and any rally will be contained.

I am not looking for a meltdown. My forecast for a trading range is intact and I believe we will revisit SPY $162. If the market continues to grind higher, I will stay on the sidelines.

My game plan today is to buy puts if the market can’t breakout to a new high for the day before noon. My stop is a close above SPY $165. If we make a new low for the day I will add to the put position. If the market closes in negative territory for the day I will add.

I am only interested in getting short today. If I don’t get the price action I am looking for I will not trade.
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