Yesterday’s decline resulted in serious technical damage. Support at SPY $143 failed and we are likely to test SPY $140 next week. After a bloodbath like that, Asset Managers are not worried that they will miss a year-end rally.
China’s flash PMI came in better than expected and their economy is stabilizing. Last week’s economic releases were better than feared and the government will keep its foot on the accelerator during the upcoming leadership change.
Europe’s flash PMI was lighter than expected. Credit concerns remain subdued, but Spain needs to formally request aid. The elections are over and the market will grow impatient.
From a macro perspective, the last remaining dark cloud is the fiscal cliff. It is weighing heavily on the market. Politicians have had a year and a half to address this and it will go down to the wire. Nothing will get done ahead of the election. DC will reconvene for a couple of weeks and then politicians will clear out for Thanksgiving. That gives them 3 weeks to get their #$%^ together.
The rhetoric on both sides will be heated. Ultimatums from President Obama are not helping. Both parties want to kick the can down the road, but they might miss the deadline.
Earnings have been good, but the guidance is worse than expected. Many companies are reporting that the quarter started off on a weak note and conditions are slipping. For the first time in years, micro events are also weighing on the market.
Durable goods orders and initial claims will be released tomorrow. They should not have a major impact on trading. Friday, we will get our first look at Q3 GDP. A miss would weigh heavily on the market.
After the close we will hear from AKAM and FFIV. The earnings should be good. Apple just released its new mini tablet and Microsoft launched Windows 8 today. Those should be bullish events for the tech sector. Tomorrow, Apple and Amazon will post results.
This could be the first year in a long time that we don’t get a year-end rally. I thought the price action last week and this week would be bullish and I did not expect issues for another more week. Earnings guidance and the fiscal cliff will continue to weigh on the market.
The bounce this morning is tenuous. After two days of selling pressure, investors will be anxious to lock in profits and they will sell into any rally. The market might be able to tread water the next two days, but SPY $140 will be tested soon.
Once Apple and Amazon announce, shorts will get more aggressive. The consensus estimate for Q3 GDP is 1.9%. I believe that number is lofty and we are set up for disappointment. Investors will get nervous ahead of the weekend and the selling pressure will grow Friday.
The market hates uncertainty. We have the election and the fiscal cliff to deal with. I believe you will see choppy trading the next two weeks with a negative bias. If support at SPY 140 fails, I will buy puts.
I am out of all of my long positions and I need a few days to lick my wounds. Once the dust settles I’ll be able to evaluate the price action and devise a game plan.
For now, keep your size small.