Market Is Losing Faith In Euro Summit. Still More Downside. Watch For Signs of Support At SPY $130

June 25, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Stocks staged a relief rally a week ago when Greek elections turned out favorably. Spanish banks received $125 billion in aid the prior week and European credit concerns temporarily eased. The rally pushed stocks up to major resistance at SPY 136 and profit-taking set in.

Asset Managers are not compelled to buy stocks at this level. There is too much uncertainty and they will bargain-hunt during big declines, but they will not chase. Investors simply don’t believe that they will miss the next big rally.

Over the weekend, Spain is requesting a bailout. Finance officials audited Spain’s banks last week and the results were sketchy. One can only imagine that conditions were worse than expected. Spain does not want a sovereign bailout because its fiscal spending policies will come under the control of the EU (Germany). That leads me to believe that the situation is dire.

Angela Merkel (German PM) said that the world is expecting too much from Germany. In other words, investors should not be waiting for them to save the EU. Germany is not going to backstop all of the other members unless serious steps are taken to resolve structural debt problems. That means that most countries would have to reduce entitlement benefits (pensions). Politicians don’t have the “stones” to do it.

Italy’s Prime Minister was appointed to “do the right thing”. He is an economist and he does not have a political agenda. His popularity is waning and an election could be forthcoming.

Interest rates in Italy and Spain are rising today and they are dangerously high. The EU will hold a summit Thursday. They will discuss the possibility of a centralized banking authority. Sovereigns will have to give up their respective control and this will not be an easy “sell”. The decision could spark a mini relief rally towards the end of the week (if the market continues to drop).

Economic conditions in China are slowing down. Traders are wondering if the recent numbers have been “padded”. They are also wondering if the PBOC has waited too long before lowering bank reserve requirements and interest rates. The fiscal spending program was downplayed by China’s media and it will pale in comparison to the 2009 infrastructure build out.

The economic news this week is fairly light. Durable goods orders, initial claims and GDP will be released. The numbers should have a slightly negative bias.

The major releases will come next week. ISM services/manufacturing, global PMI’s, ADP and the Unemployment Report will be released. This is a holiday shortened week and the trading will be very choppy. Corporations have been cautious and I believe activity will be soft across the board.

Pre-announcements have been relatively negative. The ratio of positive announcements to negative announcements is 29/73 for Q2. That is worse than the ratio of 44/67 in Q1.

I am long puts and I am riding my profits for a few more days. The news in Europe is very “heavy”. The SPY will test major support at $130 this week and I believe it will hold. If it does, I will take profits. On the other hand, if we easily blow through that level, I will hang on to my put positions.

My gut tells me that we will get a bounce next week. Eurocrats will make promises and central banks will “print money”. Worst case scenarios are priced in and even though the economic releases will be soft, they won’t be disastrous. The market typically rallies into major holidays and it tends to rally into earnings season (July 10th).

We will also get another major piece of information this week. The Supreme Court will make a decision on nationalized healthcare. If certain provisions are deemed unconstitutional, the market could rally. This would be good news for corporations.

If we find support, I might consider selling out of the money put credit spreads. This strategy will allow me to keep my distance and to take advantage of a small earnings rally.

Only time will tell if support holds. It all depends on the rhetoric out of Europe.

Stay short and use trailing stops. The selling should continue into the close. Keep an eye on SPY $130.

This week I will conduct a webinar. This is a paid event and the last pick made $1000 in a day. To view the last webianr CLICK HERE.. If you like what you see, REGISTER FOR THE WEBINAR..
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