Last week, the market broke below major support. Deteriorating economic conditions and credit concerns in Europe sparked a sell-off. Traders digested last week’s news and buyers stepped in yesterday after the downside was tested.
There hasn’t been much overnight news. Non-manufacturing PMI’s in China (54.7) and Europe (46.7) were generally in line with expectations. Weak conditions are priced in and the market is trying to rebound.
ISM services came in a little bit better than expected this morning. The S&P 500 rallied on the news, but the reaction was muted.
European credit concerns loom. Greece will hold its elections in two weeks and there will not be any polls to help us gauge the outcome. If pro-bailout candidates win (2% margin) the elections, Greece will muddle along with its austerity plans. There is still a possibility that anti-bailout leftists will win and that would result in a default and a massive market decline. Asset Managers will not aggressively bid for stocks until the election results are known.
Spain’s banks are in dire straits. European leaders want Spain to ask for a bailout, but Spain does not want to lose control over fiscal spending. It is still hoping that the IMF/ECB bailout the banks. Economic conditions in Spain are deteriorating and they have a 24% unemployment rate. Yields have risen to 6.5% and many analysts consider that the “point of no return”.
Tomorrow we will get EU GDP and the ECB will release its statement. Economic conditions will be weak and the ECB should have “dovish” rhetoric. The Beige Book will be released tomorrow afternoon and it will reveal regional economic strength across the US. These releases should be relatively benign.
On Thursday, initial jobless claims will be released. Employment conditions are slowing down and any rise in initial claims will be met with selling. Spain will hold a bond auction and I believe the results will be “acceptable”. The ECB will support the bond auction while they assess Spain’s plans for handling failed banks.
The economic news the rest of the week is fairly light. I believe that the market will test the downside. Bargain hunters will not have enough buying power to offset selling. Many Asset Managers still want to reduce risk. The problem is not “just Europe” – global economic conditions are also a concern.
Stocks tried to rally above the 200-day moving average this morning, but they were not able to hold the gains. That is now a resistance level and sellers will unload stocks when it is challenged. Bears feel comfortable holding onto short positions as long as the market stays below the 200-day moving average.
I am holding onto my puts because I believe we will see one more good push lower. If we don’t get that decline this week, I will take profits on my puts if the market is able to close above the 200-day moving average.
The highs were established early this morning and the market is drifting lower. Bulls were not able to sustain the rally and now bears will take their shot. Look for a flat market and a potential decline late in the day. Try to hang on to short positions as long as possible.