Market Will Test the Downside and Find Support. Choppy Trading Range Ahead

May 7, 2012

The news last week was not that bad and the market will find support.

The economic news in the US was a bit soft. ISM manufacturing was strong and ISM services was weak. ADP pulled back and the jobs report was weaker than expected. However, warm weather inflated the employment picture a few months ago and that distortion is correcting itself.

Initial claims dropped and that is a good sign. That improvement won’t show up until the June jobs report.

An economic soft patch will be tolerated on a short term basis because QE3 hopes will be revived.

India and Australia lowered rates and China is expected to lower bank reserve requirements any day.

Weakness in Europe will be offset by strength in China. The IMF secured $430B in new loans a week ago and that will tame Euro credit concerns.

Earnings have been good and profits are up 10% year over year. The guidance has also been positive.

Earnings releases will slow down and so will the economic releases next week. The market will find support and it will fall into a choppy trading range.

Implied volatilities are on the rise and support at SPY $136 should hold. If it fails, there is a bigger support level at SPY $134.

Today the market feels very “soft” and it has more work to do on the downside. France elected a Socialist (expected) and he will implement a tax and spend strategy. In the short run, this won’t pose a problem, but in the long run, deficits will grow as entitlement bites into the budget.

Pro-bailout candidates who support austerity suffered a setback in Greek polls. If they lose the elections, austerity measures could be rejected and default concerns will escalate.

The S&P 500 was down 15 points overnight and the market rebounded before the open. I believe bears will probe the downside for support today. The SPY $136 level should hold. If it does not, stronger support lies just below it at $134.

The earnings and economic news will settle down this week. Once support is established, we will return to a choppy trading range.

I am shorting stocks this morning. If the SPY is above Friday’s close mid-day, I will cover the shorts and call it a day. If the SPY is below $136 this afternoon, I will stick with the positions into the close.

My May put credit spreads are still profitable and I am buying half of them back. The stocks have drifted closer to the short strike and I don’t have the cushion I would like. Thanks to time decay I can still get out and make decent money.

Look for the downside to get tested early in the week. Support will be established and we will chop back and forth within a range for the next two weeks.
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