Watch For Early Rallies and Late Day Selling. Fiscal Cliff Will Keep A Lid On the Market.

October 31, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

My heart goes out to those of you who have been impacted by the storm. Moments like this unify our nation and they reveal our spirit.

The market has been pent up for four days and given all of the earnings announcements, the price action is rather subdued. Overseas markets were positive and that spilled over to our market. Earnings were decent and there were a couple of mergers. Now that the damage can be assessed, traders are taking a deep breath and we have a small relief rally underway.

Economic releases should be decent this week. Tomorrow, we will get official PMI’s, ADP employment, initial claims and ISM manufacturing. The PMI’s should be in line with the flash numbers a week ago. ADP has been overshooting the government’s employment number the last few months and it should be decent. ISM manufacturing could pull back a little. Today’s Chicago PMI number was below 50 (second consecutive month).

The Unemployment Report will be released on Friday and the consensus estimate is 120,000 new jobs. I believe the economic releases will spark a small rally on the open and that momentum will stall. Investors are anxious to take profits and they will sell into strength. The market is falling into a pattern where it rallies early and sells off late. That is a bearish sign.

European credit concerns will remain subdued. Spain has enough money to get it through the end of the year, but traders want them to formally request aid. The election results are in and the market will soon run out of patience (yields will rise). Greece is preparing its budget and it needs to be approved before it gets its next payment. I still believe European credit concerns will remain subdued through 2012.

Conditions in China are improving. There is a bit of a squabble over the leadership change, but that not weighing on the market at this time. The PBOC will keep its foot on the accelerator and the chances of a hard landing have decreased. Economic conditions have been improving (GDP, exports, retail sales and industrial production).

The fiscal cliff is taking its toll. If all of the provisions are implemented, some analysts believe that GDP could fall 5% in 2013. Congress will reconvene after the election and then they will disappear for Thanksgiving. They’ve had 18 months to address this issue and traders doubt that they will be able to reach an agreement this year. The lame-duck session won’t help matters. One of the two parties will be disappointed next week and they won’t be in a mood to negotiate.

I have been using a short-term trading approach the last two weeks and it is working well. Stocks have been opening higher and that momentum fades early in the day. I am shorting stocks once the rally stalls. Late in the day, the market retreats and I cover my positions. I am keeping my overnight exposure very small.

The economic news this week should be good and stocks will rally on the news. By midmorning, the momentum will stall and stocks will give up their gains. This trading strategy should continue to work.

As long as the SPY is below $143, I will maintain this strategy. If we break below SPY $140, I will buy puts. That is a major support level and if it is breached, bullish speculators will get flushed out.

Regardless of who wins the election next week, I believe the market will decline. If Romney wins, we will get a brief rally that could last a couple of days. The dust will settle and the fiscal cliff will weigh on the market. If Obama wins, the market will drift lower and the selling pressure will accelerate.

Retail earnings releases will also come into play next week. The results should be light and the guidance will be disappointing.

I don’t want to place any big bets until the election is over. As long as SPY $140 holds, I will stick to day trading.
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