News Not All Bad. IMF Gets $430B and China’s PMI Up. Next Support SPY $135.

April 23, 2012
Author: Peter Stolcers, Founder of OneOption

Europe is dominating the overnight news and the price action is weak this morning. Stocks have not been able to rally during the first two weeks of earnings season and that is a bad omen. The SPY is below critical support at $138 for the third time this month and the selling pressure is mounting. Dutch politicians were not able to agree on austerity measures and the Prime Minister resigned. They could lose their AAA credit rating. Nicolas Sarkozy lost the first round of France's elections to Socialist Fran├žois Hollande. Socialists never cut entitlement and France's structural deficits will grow if Hollande is elected. Germany's flash PMI fell to 46.3 from 48.4. This was the biggest source of selling pressure from my perspective. Germany has been the cornerstone for European economic stability. While the peripherals floundered, Germany was growing at a very slow pace. Now that they have dipped into negative territory, the entire EU could slip into a recession. Spain reported that it is officially in a recession after two quarters of negative growth. This grabbed a few headlines, but it should not have come as a surprise. The country has an unemployment rate of 24%. Last week, our economic releases were soft. Empire Manufacturing, new home sales, initial claims and the Philly Fed missed estimates. Jobs are the key to a sustained economic recovery and the dismal Unemployment Report from two weeks ago got the ball rolling. This week we will get durable goods orders, initial claims and Q1 GDP. Initial claims will be released Thursday and the market will be looking for a decline in applications. They have remained elevated for two weeks and traders have been waiting for the Easter distortion to self-correct. They will grow impatient this week if we don't see jobless claims ease. GDP is expected to come in at a meager 2.2%. Not all of the news has been bad. The IMF secured $430 billion from G 20 nations. The war chest has grown to $1 trillion and that should pacify credit concerns for a few months. China released its flash PMI and it grew from 48.3 to 49.1. China's economic activity is on the mend and the PBOC has hinted that it will reduce bank reserve requirements. This will keep a bid under their market. Earnings have been solid and the guidance has also been good. Unfortunately, the rally has been very narrow. Retail, tech and financials look tired and the market needs leadership from cyclical stocks. With soft economic conditions in the US and Europe, these stocks don't look like they will get off the deck. DuPont and Union Pacific posted strong results last week and both stocks traded lower after the number. Many cyclical stocks will release earnings this week and I will be watching the price action closely. If the guidance is decent and these stocks can't rally, we might not even get back above SPY $138. Spain and Italy will hold small bond auctions this week and they should go well. The ECB will support the offerings and the IMF's new funding should ease credit concerns temporarily. Interest rates in both countries are inching higher today. I believe the Fed is satisfied with current US economic activity. There won't be any mention of QE3 during the FOMC statement on Wednesday and that could weigh on the market. Apart from Germany's economic activity, the news is not that damaging. This is not the first time a European Prime Minister has resigned and Sarkozy has been trailing in the polls all along. The IMF doubled its slush fund and that good news was unexpected. Economic conditions in China are improving and the PBOC is likely to ease. I am taking a little heat on my put credit spreads, but the positions are still in good shape. If the market is not able to make a new low this afternoon, I might day trade stocks from the long side into the close. I AM KEEPING MY OVERNIGHT RISK EXPOSURE VERY LOW. Investors remember the "sell in May and go away" adage and the declines from 2010 and 2011 are still fresh in their minds. I believe they are jumping the gun a bit. We did not get the earnings rally, so the market does not have as far to correct. Instead of a spike and a decline, we could simply see an orderly drift lower. European credit fears are impossible to predict. I am long term very bearish and this will end poorly. Central banks around the world are can keep this charade going for another year or two. In the very short term, I am not overly concerned. I will keep my distance by selling OTM premium and I will watch the action. The next support level is SPY 135. That might get tested Wednesday after the FOMC. If SPY $135 fails, I will buy in my put spreads. . image

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