Look for A Sustained Relief Rally. EU and PBOC Pave the Way. Buy Calls

June 12, 2012
Author: Peter Stolcers, Founder of OneOption

Over the weekend, the EU arranged a $125 billion loan to bail out Spanish banks. The news sparked a 15 point S&P rally before the open. Stocks gradually retraced and by the close, the S&P 500 dropped 20 points. This was a substantial reversal.

Eurocrats have dragged their feet for two years and this was their first progressive move. Instead of waiting for a financial crisis like they did for Greece, Ireland and Portugal, they secured funding. Spain’s interest rates were rising and time was running out. Spain has not been running huge deficits and that gave it negotiating power.

Germany did not want to lend money to Spanish banks. It wanted to lend the money to Spain so that the EU could retain control over fiscal spending. Ultimately, Spain got its way and the banks were bailed out.

As soon as this news hit, interest rates in Italy started to climb. It is the next “weak link” and traders did not waste any time. The market declined when it saw the focus shift.

Greek elections will be held Sunday and the market will stage a relief rally. Pro-bailout candidates are expected to win.

Credit problems in Europe will continue to fester. However, this recent move by the EU could change perception. For once, traders might feel like they getting ahead of the curve. I’m not buying it, but on a short-term basis, this is a bullish event.

China released key economic data and the results missed expectations by a small margin. Industrial production, fixed asset investment and retail sales were worse than expected. However, last week China lowered interest rates by .25%. This was a surprise move and it shows that they are committed to stimulating economic growth.

China recently reduced bank reserve requirements and that is another form of easing. They will also launch a fiscal spending program that will build infrastructure. All of these efforts should stimulate economic growth. China’s GDP is expanding at a rate of 8.1%.

Decisive action by the EU and the PBOC will result in a relief rally. Credit concerns will subside and traders will expect stronger economic growth in Asia.

There are a number of domestic economic releases this week, but they are all relatively minor. Europe and China will be the focus.

I did not buy calls yesterday. The market continued to drift lower the entire day. However, I am buying calls across all of my services this morning. The downside was tested early and stocks are rebounding.

I am expecting a nice rally and I believe we could run through SPY 136. When credit concerns in Europe wane, the market stages a sustained rally.

Look for a grind higher today. Buy calls.

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