Own A Few Puts Into the Weekend. Look For Opportunities To Add Next Week.

May 25, 2012

The market was able to find support this week. Bargain hunting and short covering kicked in just above the 200-day moving average. Economic releases were generally weak and this was a technical bounce.

In the last two years, the market has declined in May. However, stocks rebounded slightly into Memorial Day. After the holiday the selling resumed and I believe that pattern will repeat itself next week.

Flash PMIs were weaker than expected in Europe. The biggest surprise came from Germany. It has been the cornerstone for economic stability in the EU and this decline in activity could be problematic. China’s flash PMI also came in below estimates. Bank loans and power consumption have declined in May. The official PMI’s will be released next Thursday.

Leftists in Greece still have a four percentage point lead in the polls. If elected they will reject austerity agreements with the troika and Greece will default. If moderates can’t form a coalition in the next week, the market will break support. The elections in Greece will take place on June 17th and Asset Managers will not bid for stocks until the results are final.

If Greece defaults, I believe the market will tank. Traders will wait to see if the ECB/IMF can avoid contagion. European banks have borrowed €1 trillion from the ECB and they should be able to shoulder the hit. The IMF has $1 trillion in its coffers and it will also provide assistance to Spain and Italy. They need to stop fear from spreading beyond Greece.

It could take weeks for the dust to settle, but a deep trough (SPY 115) would set up a short-term buying opportunity.

Economic releases next week will be centered on employment (ADP, initial claims and the Unemployment Report). Initial jobless claims have been steady at 370,000 and job growth will stall. The releases will be benign and the focus will remain on Greece.

I am long a handful of puts (10% of my normal position). I don’t want to load up ahead of a holiday. Time decay is an issue and if the market opens flat on Tuesday, these puts will lose value. There is a small chance that moderates in Greece will climb in the polls. If the race tightens, the market will rally.

I don’t like the news exposure and time decay. Consequently, I will add to my put positions next week.

The market has broken major support levels and the bounce this week was purely technical. Stocks rebounded on light volume and the move already feels like it has stalled. Economic releases have been negative and weak guidance from DELL and NTAP cast a dark cloud over the tech sector.

I suggest holding a few puts over the weekend. If conditions in Greece don’t improve, the market will open on a bearish note. We should still have time to buy puts next week.

The price action will be very choppy today and you should start your weekend early.

Please take time to honor the men and women who have given their lives to make this country great.

Happy Memorial Day!
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