100-Day MA Is Breached – Euro Economic News Will Pressure Stocks – Buy Puts.

May 14, 2012

The SPY tested the 100-Day MA ($134.70) last week and it bounced immediately. Today this level failed and the selling pressure is strong. There are dark clouds that the market will have to navigate this week.

Europe is at the top of the list. Greek politicians are trying to form a coalition to block a leftist candidate (Communist). If they can’t, he will win in 4 weeks and he will reject austerity agreements made with the troika. Greece will immediately default. As of last night, current politicians were not able to forge a coalition.

Officials in the ECB and in the German government have stated that a Greek departure is possible and that it won’t lead to contagion. The EFSF/ESM credit facilities are untested, let’s hope they work.

Merkel lost an election in Germany and that will open the door for leftists. Her austerity programs could also be in trouble.

Last week, France elected a Socialist. He vowed to replace austerity programs with a tax and spend model. This week, Hollande and Merkel will meet for the first time since the French elections.

The Euro Zone will release economic data this week. Germany’s GDP will be scrutinized. Two weeks ago their PMI fell to 46.3. That was much weaker than expected. Germany has been the cornerstone for EU strength and it is starting to falter.

Spain’s banks are grossly undercapitalized and one of the banks was nationalized last week. Analysts project that the government will need $30B to form a “bad bank”. Spain’s balance sheet is not big enough to shoulder these losses and they will need a bailout. The market is not impressed with Spain’s bad bank plan and interest rates are up 30 basis points overnight. This is a new high.

China’s economy has been growing at a decent pace, but their trade balance, factory output and retail sales missed expectations. The PBOC finally lowered bank reserve requirements, but the market had already priced in this action.

There will be many economic releases in the US this week. Recent reports have been “soft”. We will get Empire Manufacturing, retail sales, housing starts, industrial production, FOMC minutes, Philly Fed and initial claims. The manufacturing news should be in line given the ISM manufacturing number last week. Retail sales could be light and Nordstrom’s sales missed last week. It is one of the strongest retailers. The FOMC minutes could be bearish because QE3 is not currently being considered. Initial claims have stabilized and that should be a neutral number.

The big trading loss at JPM will put pressure on the financial sector. We can expect plenty of political “jaw boning” and new regulations. These stocks are in a down trend and Euro credit concerns will add to the selling pressure.

Europe is the biggest concern. Interest rates are breaking out in Spain and that is a problem. They are very close to the “point of no return”. Weak economic releases from the EU will add to the selling pressure.

Today’s technical breakdown was significant. The market will try to rally back as it did last week. However, this time the bid will weaken late in the day. Asset Managers are not going to aggressively buy stocks with all of the uncertainty in Europe. I am expecting selling pressure late in the day and the market will close on the lows.

This wave of selling will probe for support. Until we hit a couple of air pockets and we form a capitulation low, expect the selling pressure to remain steady.

I am shorting stocks today and I am buying puts to hold overnight.
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