June 11, 2012
In the last two weeks we've seen plenty of action. The market broke below the 200-day moving average after a weak round of economic news and it rebounded sharply last week. Credit concerns in Europe have plagued investors and material news could improve the landscape this week. In a surprise move Saturday, Eurocrats gave Spain $125B (twice the amount that was expected). Spain did not want a sovereign loan (i.e. Greece, Portugal, and Ireland) because it would lose control over its fiscal spending. The negotiations with its peers took months and they were resolved at the 12th hour when credit markets were crashing. I was expecting a similar process for Spain. This is the first time in two years that Eurocrats have gotten ahead of the problem and it might change market perception. Spain has not been running huge deficits like the others and it used this as a bargaining chip. The EU will lend $125B to Spanish banks (not Spain). This is the best possible outcome and it will spark a rally today. Greece is not happy because Spain's deal did not come with similar conditions (fiscal spending policies will not be scrutinized). Greece will hold elections in one week and will see if this move by the EU has an impact. Pro-bailout candidates are expected to win. However, tax receipts in Greece are dropping and huge deficits will require future bailouts. China posted economic numbers Saturday. Industrial production came in at 9.6% (below estimates of 9.9%), fixed asset investment was in line (20.1%) and retail sales came in at 13.8% (below estimates of 14.3%). These numbers would normally weigh on the market, but China is easing. Bank reserve requirements were reduced a few weeks ago and last week interest rates were cut by .25%. That was a surprise move and it was the first in two years. There are a number of economic releases next week (retail sales, PPI, business inventories, initial claims, CPI, Empire Manufacturing, industrial production and consumer sentiment). I believe inflation will be benign and manufacturing will decline. Initial jobless claims could also creep higher. These numbers should weigh slightly on the market. If Asset Managers and CEOs believe that the EU finally "gets it", they might start loosening up the purse strings. That means that the market bid will strengthen and capital expenditures will increase gradually. When credit concerns in Europe have subsided, the market has staged a sustained rally. The news was not fantastic, but it should push stocks higher for a couple of weeks. This week's price action is all about perception I will be selling my puts this morning and I will buy calls. If the bid continues to strengthen throughout the day I will add to my call positions. Exit short positions and consider getting long if the market grinds higher throughout the day. It will hit horizontal resistance at SPY 136 and that is also the 100-day moving average. A breakout above that level would be bullish. . .
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