Stocks Will Find Support In the Next Two Days. Look For Put Credit Spreading Opporunities.
Stocks rallied before the holiday and they got a little ahead of themselves. News that the EU would use the EFSF to directly aid distressed banks relieved credit concerns. End-of-the-month fund buying and a major holiday also propelled stocks. This light volume move broke through resistance at SPY $136 last Tuesday.
The market is working off this “fluff” today. The news has been generally positive. ADP reported that 179,000 new jobs were added to the private sector in June. This was much better than expected. Furthermore, initial jobless claims declined by 11,000. Analysts quickly raised their numbers for today’s jobs report.
As I mentioned in Tuesday’s comments, I felt that the consensus estimates (100,000) were too high. Nonfarm payrolls grew by 80,000 in June. The S&P 500 declined 5 points on the news and it continues to drift lower.
Central banks around the world are aggressively easing. The BOE lowered rates by 25% and they launched a $50 billion QE3. The ECB lowered rates by .25% and they reduced the discount rate to 0%. They did not reference LTRO3 and that was a slight disappointment.
The biggest surprise came out of China. The PBOC reduced rates by .25%. This is the second time they’ve done so in the last month. Inflation is not a concern and they will release their CPI Sunday (3% expected). They will also release industrial production, retail sales and new loans. This surprised rate cut could be preemptive and the economic numbers Sunday might come in light.
I like to keep things simple. The market rallied higher on light volume and shorts got squeezed on the breakout. Stocks did not deserve to trade at those levels and they are erasing those gains. Much of the news was expected and we are chopping around during a holiday.
Interest rates in Spain are near historic highs and that is problematic. Rates in Italy are also creeping higher. The EU summit will continue Monday – Tuesday and they will discuss Spain’s bailout. Greece threatened to renegotiate terms with the troika and newly elected politicians have backed down. They won’t get any sympathy from the EU until they initiate reforms. Finland’s Prime Minister threatened that they could leave the EU. They don’t want to pay everyone else’s debt. The entire union is divided.
Seagate (STX) warned that earnings would miss and tech stocks are trading lower. Pre-announcement warnings for Q2 are much higher than they were for Q1. Surprisingly, analysts have only reduced earnings estimates by .8% on the S&P 500. That leads me to believe that we are set up for disappointment.
The strongest stocks post results early in the cycle and the market tends to rally into earnings season. It will kick off next week (July 10th). I believe the market will find support in the next couple of days and it will rally above SPY $136.
When the market finds support in the next couple of days, I will sell out of the money put credit spreads on strong stocks. I am focusing on US companies that don’t depend on revenues from Europe or China. Restaurant, retail, healthcare, home building and technology all have companies that have growth in the US. I am not going to initiate large positions.
The market should establish a low this morning and the bleeding will stop. Central banks are easing and that should temporarily pacified credit concerns. China’s economic releases could push stocks lower on Monday, but support will be established. Look for put credit spreading opportunities and wait for support.
I want to generate income while I wait for a top to form. That could be two or three weeks away. This rally is the last hurrah.