Initial Claims Spiked 32K – Could Cast Some Doubt. Momentum and Activity Should Slow Down

May 16, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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The market has been on a rocket shot and we can expect the momentum to stall. Asset Managers who were under allocated scrambled to get long after the last Unemployment Report. Shorts that were looking to “sell in May” quickly covered and that catalyst has run its course. Bullish speculators also piled in and they are due to get flushed out.

My opening comment might sound bearish, but I am just looking for a normal pullback. Some of the speculative fluff needs to come out of the market and today we got the type of news that could spark profit taking.

Empire Manufacturing was weaker than expected yesterday and today the Philly Fed also missed. Perhaps the most concerning news came this morning. Initial jobless claims spiked by 32,000. Traders have been latching on to the fact that the job scene has been improving. This release might cast doubt.

Asset Managers who were playing catch-up a few days ago will be less aggressive after these economic releases. China’s industrial production and retail sales came in light and projections have been lowered from 7.8% growth to 7.6%. Europe’s economic activity is dismal and analysts keep calling for a bottom.

After a huge run, the bid will soften. The economic calendar is very light next week and earnings season is winding down. If Asset Managers pull their bids and we get a little selling, we could hit an air pocket. That will flush bullish speculators out and we will have a nice 1-2 day decline. We will not get anywhere close to support at SPY $159.

If you look at the last selloffs, they have been brief and shallow. They will present a buying opportunity and you need to be ready.

European credit concerns plagued the market the last two summers. That is not going to happen this year. EU officials want to move forward with a centralized banking plan. This will keep credit fears to a minimum.

The debt ceiling will not be an issue since the U.S. Treasury has enough money to get through September. Republicans are pushing for a flat tax and as long as the rhetoric remains constructive, they might be willing to extend it.

China’s growth is a little soft but it is still on pace to hit 7.6% this year and government officials are satisfied.

Central banks continue to print money and interest rates are at historic lows. The dividend yield on the S&P 500 is higher than the yield on US 10-Year Treasuries. At a forward P/E of 15, the S&P 500 is not overvalued.

Money will continue to flow into the stock market. Corporate balance sheets are strong and cost-cutting has preserved profits. Cash flows are being used to repurchase shares and any uptick in demand will go right to the bottom line.

The market will lose some of its momentum and you need to shift your focus individual stocks. Look for stocks that have been in an uptrend and have consolidated in a tight range. When the stock breaks through resistance – buy calls. These patterns produce sustained moves. When the momentum stalls, take profits and look for the next opportunity.

If we do get a pullback, look for stocks that have recently broken out and are retesting that breakout. If it holds, they will shoot higher on the next market rally.

I believe the market will stall next week and time decay will become an issue. Trading volumes will decline ahead of Memorial Day and there is no news to drive the action.

I am taking profits and some of my call positions and I will focus on day trading. I have been able to capture most of the moves intraday without taking overnight risk.

Look for the stock opportunities I mentioned and you will be in good shape. The Daily Report will do the heavy lifting for you. Use the Live Update table.
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