PMI’s Missed the Mark. Soft Price Action For A Week – SPY 138 Holds. Buy On Support

March 22, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market has fallen into a very tight trading range and it is searching for direction. News releases have been very light and today’s numbers had the greatest potential to strengthen the bid. Unfortunately, we did not get the results or reaction we needed.

China’s PMI came in below expectations at 48.1 versus the reading of 49.6 in February. A decline in exports was to blame. The Shanghai index finished flat. Many traders believe that bank reserve requirements will be lowered in April and that is keeping a bid under the market. The flash PMI will not spark buying in commodity stocks or heavy equipment and we will have to wait for another catalyst.

The flash PMI in Europe also missed expectations and it came in at 48.7. France and Germany were soft causing a 1% sell-off in European markets overnight. Surprisingly, EU peripherals fared a little better than expected.

Interest rates in Spain and Italy are starting to creep higher. The moves are not explosive, but they need to be monitored. A steady trend higher would not be good for the market. I still believe the market has more upside before it rolls over (May).

Federal Express beat earnings estimates and profit soared 126% on strong holiday shopping. Shipping in Asia is improving and they expect a solid fourth quarter. Unfortunately, the stock is down three dollars in early trading. The news was good, but the stock is bumping up against major resistance. The transportation sector should be able to latch on to the positives in coming weeks.

Initial jobless claims dropped by 5000 and employment conditions are improving. The mild winter in the US has helped. Commercial and residential construction spending is on the rise and building permits were strong in February. I believe builders are returning to work earlier than normal and the Unemployment Report will be strong.

That is the most likely market catalyst. The news next week will be fairly light (durable goods, GDP and initial claims).

Earnings season is approaching and we have not had many warnings. Stocks have rallied into earnings season for at least 10 straight quarters. There are no bumps in the road and this should also strengthen the bid to the market as we get closer to April 10th (AA).

The news today was not major and it was not horrible, but it’s all the market has the trade off of. Asset Managers will pull their bids so that they can gauge the selling pressure. I believe the losses will be contained and the SPY will find support at 138 during the next week.

The S&P 500 is down 10 points on the open and we will probe for support early. The lows should be established by mid-morning and the market will rebound slightly throughout the day. We could see additional selling tomorrow.

I am holding onto my call positions and I plan to add once support is established. I am maintaining my “buy the dip” mentality and I only have 40% of my normal exposure at this time. In a week, I will look to add.

Asset Managers want to increase their risk exposure. Over $6 trillion sits on the sidelines in US Treasuries that are yielding little. With the European credit crisis off the table, assets will rotate out of fixed income and into equities. Central banks around the world are easing and investors are looking for growth.

Don’t let this “speed bump” scare you off. We didn’t get the news we wanted, but we left much of our powder dry. Soon we will have an opportunity to add to our positions. Don’t jump on this dip right away. We might not see decent support for another week. I want to get as close to the Unemployment Report as possible before I add.

The decline is not from aggressive selling or profit-taking. It is simply a buying boycott and Asset Managers are waiting for a catalyst.
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