Market Will Hit Headwinds Today. Quick Little Shorting Opportunity If We Break SPY 139.80.

April 27, 2012

Yesterday, the market staged an impressive rally. Stocks moved higher throughout the day and the news was rather negative. This is a sign of strength.

Wednesday, the Fed did not suggest that QE3 was currently being considered. A few weeks ago, the market sold off on similar news. Yesterday, initial jobless claims only fell by 1,000. Analysts have been looking for a decline in the range of 10,000 the last two weeks. This does not bode well for next week’s Unemployment Report.

Jobs are the key to a sustained economic recovery and growth has stalled. Next Wednesday, the ADP report will be highly scrutinized. It will provide insights into private sector job growth in April. Given the recent trend in initial jobless claims, traders will error on the side of caution and we could see selling into the number.

This morning Q1 GDP came in at 2.2%. That was lighter than expected and the “whisper” was closer to 2.5%.

Standard & Poor’s lowered Spain’s credit rating two notches overnight. A single notch downgrade was expected. Italy held a bond auction and it was fair. Interest rates in Spain and Italy are both on the rise this morning.

The overnight earnings news was mixed. Overall, 40% of the S&P 500 has reported and profits are up 10% year-over-year. That is a good showing.

As I mentioned this week, the market will tenuously move higher. We’ve had a great week and I believe the momentum will slow heading into next week. The jobs data will keep a lid on the rally as it inches towards the highs from March. We are only 20 S&P points from that level.

Cyclical stocks have stalled and that is not a healthy sign. Apart from railroads, the transportation sector has been soft. Asset Managers are cautious and they are not fully embracing a sustained economic recovery.

I believe the market could sell off a little today. If we make a new low this morning (SPY 139.80), I will short a few stocks. I will not carry overnight positions. My put credit spreads are in great shape and I don’t need to “push the envelope” during a lackluster day.

Next week will be filled with economic releases. I expect to see weakness in Europe, soft results in the US and strength in China. The key is China. It needs to more than offset the other two. If their PMI comes in a little light it will weigh on global markets.

The market should still have a couple of decent weeks, but the move I have been looking for is close to running its course. In another week or two, the “sell in May and go away” crowd will take another shot. A breakdown below SPY $138 will quickly challenge SPY $136. If that level falls with ease, a correction will be underway.

Look for a quick trade to the downside today. Keep overnight exposure to a minimum.
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