Use SPY 138 As Your Guide. Commodity Stocks and Cyclicals Look Attractive. Be Nimble

April 12, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

A week ago, the market was flirting with multi-year highs. Strong economic numbers from China and the US supported the rally. All it took was one bad bond auction in Spain to spark fear. Stocks pulled back sharply and they were nailed a second time by a weak jobs report. The market fell below major support at
SPY 138 Monday morning.

That wave of selling has run its course and Asset Managers are buying ahead of earnings season. Alcoa posted decent numbers and they cited strength in China. Commodity stocks have lagged and now they are bouncing off of support. After the close, Google will report. They have been spending a lot of money and analysts are anxious to see if those investments are paying off. The stock has been range bound since October and it has the potential to move either way.

Tomorrow morning, WFC and JPM will post results. Many analysts believe that profits will be soft (lower trading volumes and a sequential drop in consumer lending). Financial stocks have rallied substantially in the first quarter (+24%). Much of the good news is priced in and credit concerns/government regulations could keep a lid on the sector. I am not expecting a major rally the news.

Italy held a bond auction yesterday and the results were not disastrous. Yields rose from 2.76% a month ago to 3.89% and the bid to cover with 1.4. I would not consider this a great auction, but the market seemed satisfied with the results.

This morning, initial jobless claims rose to 380,000. That was much higher than the consensus estimate of 355,000 and it was 13,000 higher than last week’s number. The S&P 500 pulled back six points on the news, but it quickly recovered. Easter might have inflated the number since applicants postpone filing during holidays. Furthermore, slowing job growth elevates the hope for QE3.

Tonight, China will release its GDP, IP and retail sales. Economic activity has been on the mend and the results should be good. This could fuel an overnight rally.

Earnings season will shift into high gear next week. There have not been many warnings and the news should be good. Tech stocks seem nervous. I like energy stocks. They have lagged during the rally and oil prices have stayed above $105/barrel. Earnings should be great for non-gas producers.

Here’s how the overall market is shaping up. If European interest rates stabilized, strong economic numbers (US and China) and attractive stock valuations will push the market higher. I don’t believe it will make it back to SPY142. Toward the end of April stocks will weaken and credit concerns in Europe will lead to profit-taking.

Trading this rally is like walking on thin ice. At any moment, European credit concerns can flare up. The ECB could support bond auctions (SMP) or launch LTRO3. Those actions will temporarily pacify investors. However, Eurocrats have not forged fiscal policies as they promised.

Spain and Italy will continue to run huge deficits and long-term structural problems have not been addressed. European officials don’t act until they absolutely have to. The union is fragmented and summer vacations are higher on the priority list than a potential credit crisis.

The price action has been getting “toppy”. Two months ago, stocks were in a nice steady path higher. Market declines were a one-day event. In the last few weeks, we have seen a number of overnight gaps lower. The rebounds have not been as strong and that indicates selling pressure. Stocks broke below major support this week causing psychological damage.

The market is back above resistance at SPY 138. I had a small put position and I covered it this morning. I got the news I wanted (Italian bond auction and jobless claims), but not the reaction I expected. I will stay on the sidelines and evaluate the price action.

I will be day trading stocks from the long side after earnings announcements as long as the SPY is above 138. I will use the Live Update table as my guide. If the market falls back below 138 and European interest rates are climbing, I will get short. The second breakdown would be much more meaningful. I still feel that we are a couple of weeks away from an excellent shorting opportunity.

Use SPY 138 as your guide.
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