Buy Puts. FOMC Minutes Will Be Hawkish – No QE3. Late Day Selling Is Bearish.

May 16, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, stocks tried to rally throughout the day but a late round of selling pushed the market down to new relative lows. The SPY is below the 100-Day MA and bears have the ball. Asset Managers will not aggressively bid for stocks in times of uncertainty.

Greece is going to institute a “caretaker” government until the elections in June. Current politicians have been unable to form a coalition and if the leftist candidate is elected, he will reject austerity agreements with the IMF/ECB/EU. That will send the country into immediate default.

Interest rates in Spain touched 6.5% today. They have backed off slightly, but this is widely considered the “point of no return”. Their unemployment rate is 24% and their banks are grossly undercapitalized. Investors were not impressed by Spain’s “bad bank” plan last week.

European economic activity is deteriorating. Germany posted a better-than-expected 1.7% growth rate (.9% expected) and that sparked a small relief rally Tuesday. The rest of Europe missed expectations. Next week the flash PMIs will be released.

Weakness is expected in Europe, but traders have been looking for signs of strength in China. Unfortunately, factory output, retail sales and the trade balance all came in light. Power consumption in April dropped considerably from the Q1 average. Furthermore, bank loans have been very soft the first two weeks of May. If China’s PMI declines next week, the market will sell off. Stocks in Asia were weak overnight.

US manufacturing has been steady and Empire Manufacturing beat estimates yesterday. Industrial production and the Philly Fed should be decent this week. Initial jobless claims have been stable at 365,000 the last two weeks. An uptick tomorrow would not be good. Jobs need to hold steady or the market will sell off.

This afternoon, the FOMC minutes will be released. The Fed is not currently considering QE3 and this release could have a bearish impact on the market this afternoon.

Moody’s is going to postpone its banking downgrades for the US. It needs time to reevaluate after JP Morgan’s losses. This dark cloud will continue to put pressure on the financial sector.

The technical damage has been done and there is not enough good news to attract buyers. Asset Managers will pull their bids and they will wait for support. The price action tells me that one bad news item could result in an “air pocket”. We need a couple of them so that a capitulation low is established.

Stocks have been selling off late in the day and that is a bearish sign. I believe today’s gains will vaporize after the FOMC minutes are released.

I bought puts Monday and I added to my positions yesterday. I will buy a few more puts today and my allocation is around 35% of my normal size. I don’t want to get overly aggressive. If Greek politicians form a coalition, the market could quickly run the other way. Consequently, my size is relatively small. If the SPY closes above the 100-day moving average, I will sell my puts.

Option implied volatilities are rising and fear is growing on a daily basis. Buy puts and use the bearish picks on the Live Update table as your guide. Place stops above resistance levels.

Look for more selling this afternoon.
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