Earnings Push the SPY Back Above $138. Watch FOMC and Initial Claims. Cyclicals Are the Key

April 25, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market rebounded from Monday’s decline and the losses were erased. European credit concerns should ease and strong earnings will push the market higher. The SPY is back above the critical $138 level.

Over the weekend, the IMF secured $430 billion from G20 nations. That doubles their coffers and they now have over $1 trillion for future bailouts. In the grand scheme of things, this is not going to solve their problems. However, on a short-term basis it will provide investors with a sense of security.

France’s is likely to elect Hollande (Socialist). This news is already priced into the market and it will have future implications. The Dutch Prime Minister resigned when austerity measures were not approved. This has been a common theme in Europe during the last year and the Netherlands retained their triple-A credit rating. Neither event is market moving.

Economic conditions in Germany softened (flash PMI was 46.2) and they have been the cornerstone for European economic stability. This was the biggest news out of Europe this week. Spain announced it is officially in a recession after two consecutive quarters of contraction. This was expected and their unemployment rate is 24%.

The weakness and Europe has been offset by strength in China. Their GDP grew 8.1% and other economic releases (flash PMI, IP, retail sales and trade balance) have been strong. The PBOC has hinted that it will lower bank reserve requirements. This backdrop will attract buyers.

US economic releases have been soft. Today, durable goods orders fell 4.2%. That is a volatile number and it normally carries little weight. Last week, Empire Manufacturing, the Philly Fed, housing starts and initial claims were weak. Jobs are the key to a sustained economic recovery and tomorrow’s initial claims number will be scrutinized. The consensus estimate is 373,000 and I believe we will come in better-than-expected.

This afternoon, the FOMC will release its statement. The comments should be dovish given the recent decline in activity. The Fed will probably dangle the “QE3 carrot”. If they don’t, the market will pull back. Ben Bernanke will speak after the release and his statements could carry more weight than the FOMC’s release.

Central banks around the world are easing and that is always positive for the market. Australia is expected to cut this week and India lowered interest rates (.5%) for the first time in 3 years.

In the last week, I have mentioned that credit concerns in Europe should ease. Economic weakness in Europe is offset by a recovery in China. Strong earnings should push the market higher. That scenario seems to be playing out.

I also mentioned that cyclical stocks need to participate. Yesterday, we saw these stocks rally throughout the day. We are also seeing continuation today. The market needs new leadership and these stocks are a great barometer. If Asset Managers don’t believe in a sustained economic recovery, they won’t buy these stocks. Cyclicals have just gotten off the deck and we need to see follow-through.

Oil producers will post earnings this week and that is another sector that could catch fire. WTI has been trading over $105 per barrel and earnings should be strong. This sector carries a lot of weight in the S&P 500 and it has the potential to push the market higher. It has lagged during the rally and it has room to run.

The overnight earnings were excellent. Investors were cautious ahead of Apple’s release and the stock is up $50 today. That is helping the market rally today.

My put credit spreads are in great shape and I have more confidence now that the SPY is back above $138. I suspected that the “sell in May and go away” crowd was getting ahead of itself. Those shorts are getting squeezed and the market could challenge the highs from March if cyclicals and energy stocks grind higher.

If the FOMC generates a positive reaction, I will buy (day trade) stocks into the close. I want to be on the sidelines for tomorrow’s initial claims number. If the number is under 360,000, I will buy stocks near the open. Conversely, if the market pulls back after the FOMC, I will not trade.

The jobs number is more important to me than the FOMC and I hope we pullback this afternoon. That would provide me with an excellent entry point tomorrow on the back of a good initial claims number.

I am tenuously favoring the upside. Any pullback will set up a buying opportunity. I will monitor cyclical stocks and energy stocks. They will be my barometer and the SPY needs to stay above $138.

The market rally has stalled after the open and we are “dead till the Fed”. Know that volatility lies ahead. The clarity will improve dramatically after tomorrow’s initial claims number.
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