Yesterday, the market sold off on Greek credit concerns. Tomorrow, private investors will swap bonds and take the agreed-upon “haircuts”. If the participation is extremely weak, Greece will have a disorderly default. This is not likely.
Estimates are that 70% to 90% of private investors will participate. I am hearing rumors that it might come in at the upper end of that range and a disorderly default will be avoided. This should spark a relief rally. The results will not be known until one hour before the close Thursday.
ADP employment showed that 216,000 jobs were added to the private sector in February. This was slightly better than expected and it was much better than the 173,000 jobs that were added in January. This number bodes well for Friday’s Unemployment Report.
Initial jobless claims have been decreasing for two months and that trend is very strong. Tomorrow’s number would instill confidence ahead of the jobs report. Consensus estimates call for 206,000 new jobs and I believe that number is conservative. There’s a good chance we can meet or beat that number.
Thursday night, China will release its PPI/CPI. A few weeks ago Chinese officials said that they expect the number to fall to 4% in February. This would be the lowest level in years and it would pave the way for future easing. The market would have a positive reaction even if inflation comes in around 4.3%.
Central banks around the world are easing and it’s never wise to trade against that powerful force. Earnings have been decent and stock valuations are cheap. I believe it is too early to short this market. The bad news is not “bad enough” to generate sustained selling.
Yesterday, we saw a round of profit-taking. The market was not able to punch through major resistance and Asset Managers pulled their bids. They wanted to gauge the selling pressure. Bullish sentiment has been off the charts and speculators were flushed out.
Stocks are rebounding today and we will see how investors react to Apple’s new product. This stock has run up dramatically in recent weeks and it accounts for 12% of the S&P 500 rally this year. If traders “sell the news”, this mega-cap stock could weigh on the market.
Texas Instruments and Altera will provide mid-quarter updates and the tech sector could be a little soft for a few days.
Market conditions should stabilize over the next two days. The news from Greece and China will be “market friendly”. Initial jobless claims will be in line and that will raise spirits heading into Friday. I believe the consensus estimates for the jobs report are conservative and the market will rebound on the news.
As I mentioned yesterday, there are simply too many positives and I’m not going to let my long-term bearish forecast obscure what I see in the short run. Stocks should be able to rally into earnings season and that will begin in one month.
I mentioned yesterday that I would be exiting some of my VIX calls. I will sell the rest today. When the market challenges the highs of the year, I will buy the VXX. This hedge is easier to manage since I don’t have to worry about time decay and I don’t have to roll the position.
I am adding to call positions today and I will add again tomorrow. My overall exposure is about one third of what I would normally have on. The price action has been very lackluster and I don’t see that changing in the near future. Stocks will rally, but they won’t scream higher. The gains from this point on will be hard-fought.
Keep your size small and stay long. Look for positive price action into the weekend.