Selling Pressure Will Continue Next Week. Support At SPY 130 Will Hold. Use Trailing Stops
My forecasts have been spot on. We caught the selloff in May and we sold our put positions a week ago. Then we bought calls ahead of the reief rally and the market climbed 4%. I told you the SPY would hit resistance at $136 and to exit bullish positions ahead of the FOMC. I also advised buying puts Wednesday and Thursday because the flash PMI’s would be weak. My last few requests have only generated a few reviews. If you are following my commentary, I know you are making money. Please CLICK HERE to post a review of my blog on Investimonials. Thank you – your comments keep me motivated.
This week, the market staged a relief rally. Traders got the news they wanted from Spain/Greece and fear was temporarily pacified. The bounce was very tenuous and the volume was light. Asset Managers are passively bidding for stocks and they do not believe that they will miss the next big rally.
Uncertainty still looms and that will keep capital on the sidelines. Corporations will not invest (or add to payrolls) during times of uncertainty. Deficits continue to grow in Greece and the government is divided. They will soon ask for another bailout. Italy’s Prime Minister is treading on thin ice and he could lose control. Spanish banks received $125 billion in aid, but more will be needed. Banking officials audited Spain’s banks and analysts feel the research was short on specifics.
Next week, the EU will hold a summit. Traders are hoping that sovereigns will agree to a unified European banking system. This outcome might be possible but it would take months to iron out. The news will temporarily pacify investors and the market will rally into the Fourth of July holiday and earnings season.
Unfortunately, the EU is long on promises and short on action. Eight months ago, they promised to amend the EU treaty. It would include universal fiscal spending guidelines. The market liked the rhetoric, but no attempts have been made to draft a plan.
Eurocrats will pat themselves on the back next week and then they will disappear on vacation. The market will stew over deteriorating economic conditions and panic will push stocks lower. I believe corporations will provide cautious guidance and the market will begin a sustained decline late in July.
Economic releases around the globe were soft this week (China’s flash PMI, European flash PMI, the Philly Fed, initial claims and Empire Manufacturing). Central banks are easing, but the market wants more. Next week we will get durable goods orders and GDP. The results will be soft.
The Supreme Court is expected to render a healthcare decision next Thursday. If parts of the program are considered unconstitutional, the market could rally. Healthcare expenses are putting a huge burden on corporations and any relief would be welcome.
Asset Managers are also playing it safe. They see dark clouds on the horizon and they don’t want to chase stocks. Valuations are attractive and 10-year yields are at historic lows (1.6%). Asset Managers will bargain hunt, but they won’t be aggressive.
I believe the SPY will test support at $130 next week on dismal economic news. That is a horizontal support level and it is the 200-day moving average. EU officials will whisper “sweet nothings” and the Supreme Court might render a “market friendly” decision.
Stocks will bounce into the Fourth of July and earnings season. This move will be short-lived and I plan on selling out of the money put credit put spreads. I want to distance myself from the action and I want to take advantage of time premium decay. Towards the end of July, I will be scaling into put positions.
Right now, I am enjoying the profits I have on my short positions. The market is trying to rebound, but I don’t believe this bounce will gain traction. Bears flexed their muscles yesterday and we could see selling pressure later today. I’m not looking for a massive decline and I plan to use trailing stops. I will not let my current position turn into a loser.
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