Look For Late Day Selling. Decent Economic News Next Week Will Slow the Bleeding

October 26, 2012

The market breached key support at SPY $143 last week and Asset Managers are not worried that they will miss a year-end rally. The fiscal cliff has sparked fear and profit-taking has set in. Traders do not believe that Congress will be able to find a solution before year-end.

Politicians have ignored the problem for 18 months. They will reconvene after the election for a couple of weeks and then they will disappear for Thanksgiving. One of the two parties will be disappointed after the election and they won’t be in a mood to negotiate. “Lame ducks” could also stand in the way. Some analysts believe that GDP could fall by 5% next year if all of the provisions are implemented.

Today we got our first look at Q3 GDP. It came in better than feared (2%), but it was not a robust number. Next week, economic releases will be in focus. Official PMI’s will be released and we will get ISM manufacturing, ADP, official PMI’s and the Unemployment Report. The news should be generally positive, but I doubt it will spark much of a rally.

Most of the major earnings releases are behind us. Apple and Amazon announced yesterday and the news has not had much of a market impact. Guidance has been the biggest concern this earnings season. Forecasts are light and companies have stated that activity was soft at the beginning of the current quarter and conditions continue to slip.

Corporations are playing it safe and they will wait for clarity. The election outcome will have a major impact on investment decisions and the fiscal cliff could have an immediate impact.

China’s economic conditions are improving, but Japan faces a fiscal cliff. Japan’s exports fell dramatically and tension between the two countries is building.

Euro credit concerns are subdued, but the market is growing impatient. It wants Spain formally request aid. This weekend, Greece will have to deliver an austerity plan to the troika. It has to meet budget targets to secure its next payment. This should not be an issue.

The market has established a bearish pattern. It rallies early in the day and it sells off late in the day. I believe traders will get nervous ahead of the weekend and the market will drift lower this afternoon.

I have been day trading and I’m keeping my overnight exposure to a minimum. Once the early rally runs its course I am shorting stocks. I am buying them back late in the day.

The economic releases next week will be decent. They will slow the selling pressure, but they will not offset it. Investors are nervous and they are taking some chips off of the table. Now that the breakout at SPY $143 has failed, bullish speculators are also on the brink of getting flushed out.

I believe support at SPY $140 will be tested next week. I’m not looking for a massive plunge, just persistent selling. The economic releases will be decent and they will slow the bleeding.

The market has a way of sending politicians a message. When stocks continue to sell off, Washington will understand that they need to get their act together.

If SPY $140 fails, buy puts.
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