Selling Should Run Its Course Over the Next Few Days. Go To Cash and Wait For Support.

February 21, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market hit an air pocket. Investors were spooked by the FOMC minutes and once the momentum was established, Asset Managers pulled their bids. Unfortunately, the overnight news was not good and the selling continues this morning.

Europe’s flash PMI was weaker than expected. All of the gains from January evaporated. Conditions are weak, but that should not come as a major surprise. Most analysts would be satisfied if the EU were able to establish an economic floor. Overnight bond auctions in Spain were good and credit concerns remain low.

Initial jobless claims in the US rose by 20,000. That was higher than expected, but the level is still decent at 362,000. There are many seasonal adjustments so there is a lot of noise in the number. Jobs are the cornerstone to an economic recovery and we need to see continual improvement.

Wal-Mart posted earnings this morning and it set the tone for the retail sector. It beat estimates, but it believes same-store sales will be flat in Q1. This is consistent with the memo that was leaked last week. The expectations were low so the stock is trading a little higher.

Payroll tax credits have expired and gasoline prices are at their highest level ever for the month of February. This will impact discretionary spending and it will hurt retail/restaurant. Earnings releases next week will be dominated by retailers.

The FOMC minutes were more dovish than last month’s minutes. However, investors were spooked by the “great unwind”. It is going to happen sooner or later. The Fed has been purchasing 75% of all debt issued by the U.S. Treasury and that can’t continue forever. Once QE stops, the Fed doesn’t have to unwind their position right away. They can maintain a large balance sheet for a while. As economic conditions improve, they can sell bonds.

I still feel that the sequester will keep us in the “sweet spot”. Current economic growth will offset the decrease in activity caused by government spending cuts. The economy will continue to sputter along at a 1.5% – 2% growth rate and the Fed will remain accommodative.

China’s growth is back on track and the PBOC is confident enough to remove liquidity. They might restrict real estate transactions, but that news is old. Retail sales came in a little light last weekend, but that should not be a major concern. China will post its flash PMI Sunday night and it should be good.

Asset Managers do not like to chase stocks. They need a reason to buy them close to an all-time high. Over the course of the next month, they will be able to evaluate the effects of the sequester and they will be able to monitor economic conditions. If they still feel like we are coming out of a trough, they will accelerate purchases. They will also watch consensus estimates. If analysts guide higher, stocks will rally into Q1 earnings season.

Yesterday’s selloff felt nasty. In reality, we just stripped out last week’s fluffy little light volume rally. I hope you took my warning and lightened up your positions. February is historically a weak month.

The market will probe for support and there was enough negative news overnight to attract profit taking. The volume should be light on the way down and there is support at SPY 148. Major support lies at 145. Any decline will be swift and brief. The macro backdrop is still intact.

I believe the market is in for a few days of weakness. Next week, prices will firm up and that will present a buying opportunity. We want to see strong economic releases and we need momentum heading into the sequester. If we don’t get it, the tone will change.

I still believe it is too early to get bearish. As long as major technical support is intact and the macro backdrop is in place, I will buy on support.

Nimble traders can short this market the next few days, but know that you are going against the grain. Keep your positions small and your stops tight.

Longer-term traders should keep their powder dry and wait for support. That will present a nice buying opportunity.
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