Focus Shifts To Ecomomic Releases. China’s PMI Tonight. We Should See Mild Selling

April 30, 2012

This morning, stocks are testing the downside after a nice rally last week. Good news is priced in and the selling pressure will increase as the market gets close to the highs from March. The focus will shift this week from earnings to economic releases.

China will be posting its manufacturing PMI tonight. Growth has been rebounding recently and it needs to stay intact for the market to move higher. Analysts are waiting for the PBOC to lower bank reserve requirements. Strength in China has to offset weakness in Europe.

PMI’s will also be released in the Euro Zone Wednesday. Last week, Germany’s flash PMI fell to 46.3 and that was much worse than expected. It has been the cornerstone of economic stability in Europe and this is a concern. Almost half of the EU is officially in a recession.

Over the weekend, Standard & Poor’s downgraded 16 financial institutions in Spain. Last week they downgraded the country’s credit rating by two notches.

A week ago, the IMF increased its “slush fund” to more than $1 trillion. That will temporarily ease credit concerns. Spain will hold a bond auction Thursday and this theory will be tested. Rising interest rates would not be a good sign.

In the US, ISM manufacturing and ISM services are expected to come in flat. All eyes will be on employment releases. The ADP report will be posted Wednesday and it will provide insights on private sector job growth. It was substantially higher than the government’s Unemployment Report last month. We will see if it is revised downward. Initial jobless claims remain elevated and that will weigh on the market ahead of the jobs report. Analysts are expecting 175,000 new jobs on Friday and a “miss” would spark selling.

Earnings have been decent. About half of the S&P 500 companies have reported and earnings are up 10% year-over-year. The guidance has been good.

Tonight’s PMI from China will set the tone. A strong number will prevent a round of profit-taking. Conversely, any weakness will result in selling pressure. Traders are prepared to error on the side of caution.

I mentioned last Friday that stocks could pull back this week. We saw nice gains last week and Asset Managers will not aggressively bid for stocks ahead of major economic releases. From a seasonal standpoint, we are getting close to the “sell in May and go away” window.

If the market breaks below SPY 139.60 this morning, I will short stocks. I will use the Live Update table as my guide and I will cover positions before the close. I still want to limit my overnight exposure.

I am short out of the money put credit spreads on cyclical stocks. That is my core position and it is performing well. I am not adding to those positions.

Look for possible selling pressure today and a drift lower into the close. SPY 138 will hold and I don’t believe we will test that level today.
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