Economic Releases Were Soft. Price Action Is Bearish. Look For Late Day Selling

The market has broken major support and the price action is weak. Stocks try to rally on the open and the selling pressure builds throughout the day. This week, the market has finished on its lows every day. Asset Managers are not going to aggressively bid for stocks during times of uncertainty. They have pulled their bids and they will wait for support. That means the market will continue to drift lower. Along the way, we are likely to see a couple of "air pockets" before a capitulation low is formed. The political backdrop in Greece is perilous. Parties have not been able to form a coalition to run against a leftist candidate who will reject austerity agreements if elected. That would send Greece into immediate default. This will all play out in the next month. From a trading standpoint, I wish European officials would let Greece default. It would send a shockwave through the market, but the problem would finally be resolved. The ECB has loaned €1 trillion to European banks and their balance sheets should be able to shoulder the write-downs. The IMF also has $1 trillion in its coffers and it could help to avoid contagion. Greece is a tiny gnat that keeps pestering the market. Spain's banks are grossly undercapitalized and the market was unimpressed with their "bad bank" plan. Interest rates are at all-time highs and they are at the critical 6 1/2% level. Most analysts believe that it represents the "point of no return". Economic conditions in Europe are deteriorating. Germany's GDP was better than expected, but the rest of the EU was weak. Flash PMIs for Europe and China will be posted in a week. The growth in China has not lived up to expectations. Factory output, the trade balance and retail sales missed estimates last week. Furthermore, power consumption has declined considerably in April relative to the average during the first quarter. Bank loans during the first two weeks of May have also decreased. China is the growth engine for the global economy and if it falters, stock markets will fall. Economic conditions in the US have been stable. This morning, initial jobless claims increased by 5,000. That was greater than expected and another uptick next week would raise concerns. The Philly Fed and LEI were also weaker than expected today. Container volume out of the Port of Los Angeles was mixed. Inbound freight was modestly positive and outbound freight was slightly negative. That suggests stable economic activity. The FOMC minutes released yesterday confirmed that the Fed is in a holding pattern. They will not launch QE3 unless economic conditions deteriorate. They are “out of bullets” and recent actions have not stimulated growth. The economy will need to stand on its own two feet. In coming months, the debt ceiling will become an issue. It appears that funds won't stretch through the November elections. The last time we went through this process our credit rating was downgraded. Massive budget cuts are scheduled to automatically kick in on January 1st. The bears currently have the ball. Major support levels have been breached and the price action suggests that the market will move lower. The news is light and the selling momentum is building. If Greek politicians are able to form a coalition, we will see a relief rally. That possibility exists and I am not overextending myself. I am long puts and I have about a third of my normal position. If the market closes above the 100-day moving average, I will take my profits. I hope you followed my suggestion to get short early in the week. Use trailing stops on your shorts. I believe the market will chop around most of the day. The news has been negative and we should see a late round of selling. . .

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