Asset Managers Will Not Bid For Stocks – Too Much Uncertainty. Market Will Test 200-Day MA

May 23, 2012
Author: Peter Stolcers, Founder of OneOption
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Pete

Last week, the market broke major support levels and the daily price action was bearish. Stocks opened on their highs and closed on their lows each day. The selling pressure was accentuated by option expiration and the market rested just above the 200-day moving average when it finished the week.

Monday, a mild round of bullish news sparked buying. That bounce forced shorts to cover and the S&P 500 rallied 22 points. As I mentioned in my daily comments, that rally was all “fluff”. The news did not justify the move.

Pro-bailout candidates in Greece fared slightly better in the polls. However, politicians have yet to form a coalition so that they can defeat the leftist front runner who will reject austerity agreements with the troika. Elections will be held in three weeks and Greece will default if he wins.

European officials are preparing for the possibility that Greece will withdraw from the EU. Finally, this is being discussed publicly. The ECB has many tools to prevent contagion, but they are all untested.

Eurocrats are long on ideas and short on action. They will not make any major decisions until the Greek elections are final. Consequently, Asset Managers will not bid for stocks until they have more clarity.

Fitch warned that nonresident investors are pulling money out of Spain and Italy. The market was not overly impressed with Spain’s “bad bank” plan a week ago. Analysts now believe that €60 billion could be required to shore up the problem. Write-downs could exceed €250 billion.

The major economic news will hit tomorrow. Flash PMI’s from Asia, Europe and the US (first time ever) will be released. Horrible results are expected in Europe and I believe they will be a little better than expected (Germany’s GDP beat expectations at 1.7%). On the flipside, traders are counting on strength in China and I believe they will be disappointed. Power consumption is declining relative to Q1 usage, bank loans have dropped in May and commodity purchasers are defaulting on contracts. The PMIs will be relatively neutral with a slight bearish bias.

Initial claims could decline tomorrow. Workers who recently lost their jobs often postpone filing for unemployment benefits before major holidays. This will self-correct in a week and it won’t fool anyone into thinking that jobs are recovering. Durable goods orders are volatile from month to month and the release won’t have much of an impact.

As we get closer to August, the debt ceiling will become an issue. Politicians might have to negotiate before the elections as money runs out. This process resulted in a credit downgrade a year ago. Mandatory spending cuts will also take effect January 1 and that will weigh on the market.

Last night, Dell reported earnings. They missed on the top line and that has sparked selling pressure across the tech sector. Hewlett-Packard will release earnings tonight and we can expect similar results.

The bounce on Monday was nothing more than short covering. Asset Managers will not buy aggressively until Europe stabilizes and growth in China is confirmed. We will test the 200-day moving average next week.

Stocks have declined in May the last two years. They have taken a breather the week before Memorial Day and then the selling pressure resumes after the holiday. This year, we might not get that reprieve.

Stocks tried to follow through after Monday’s rally and we saw heavy selling pressure into the close. The Market has been declining steadily all day and the momentum is strong. We should find support at SPY 129.60 today. That was Friday’s close.

The PMI’s need to surprise on the upside (unlikely) or we will see continued selling tomorrow. The 200-day moving average (SPY 128.20) should hold this week. That is also a major horizontal support level.

The situation in Greece could reach a climax in the next couple of weeks. If they default, the market will tank. Traders will error on the side of caution.

I am currently flat, but I will buy a few puts today (10% of normal position). During Monday’s rally I mentioned that I was more inclined to buy puts on the rally. Unfortunately, I did not act on my intuition. I missed a fantastic entry point and now I will cautiously ease in. If Friday’s low fails, the selling pressure will accelerate.

Buy some puts, but keep your size small. We have been nailing excellent shorts in the Daily Report. Focus on stocks that are rising to the top of the Live Update table.
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