The News Was Not That Damaging. This Is A Light Round of Profit Taking. Jobs Will Attract Buyers.

March 5, 2012

There was a little news out this weekend, but it was not negative enough to justify this morning’s decline. Stocks were not able to rally last week after solid economic releases (GDP, retail sales, Chicago PMI and initial claims) and profit-taking could be a small issue. The market is trying to break through major resistance and the price action has been miserable.

Year-to-date, volumes on the NYSE are down 6%. Option volumes are off by 7% and commodities trading activity is down 30%. Traders are looking for a catalyst.

China’s services PMI fell from 52.9 to 48.4 in February. That was a fairly large miss, but it is only one data point. This has been the primary “driver” this morning. The service is PMI in Japan and Europe was in line.

China also lowered its growth forecast for 2012. It now expects a 7.5% increase instead of an 8% increase. Many analysts felt that their expectations could fall to 7% and this news is not the source.

Later in the week, China will release inflation numbers (Thursday). Officials believe that it could fall to 4%. This would be the lowest level in years and it would pave the way for future easing. China’s stock market has performed well this year and I believe it will stabilize in the next day or two.

European banks gobbled up €530 billion in new loans from the ECB (LTRO2). This should provide a decent bid for short-term sovereign bond auctions. Credit concerns have temporarily been pacified and the ECB can always launch another LTRO3 if it feels the need.

Domestic economic releases have been strong and this morning ISM services came in at 57.3. That was better than the 56.8 reading last month and the estimate of 57. ADP employment will be released Wednesday and initial claims will be released Thursday. Employment conditions have been improving steadily and that bodes well for Friday’s Unemployment Report. Consensus estimates are for 207,000 new jobs in February. That is lower than the 243,000 jobs that were created in January.

I believe that today’s pullback will probe for support. We might find it today or it could take a couple of days. Once it is established, stocks will rebound and challenge resistance.

Energy stocks are weighing on the market. Oil prices have jumped and the government is trying to spook speculators out of long positions. They are threatening to release strategic petroleum reserves (SPR’s). These inventories are intended for supply disruptions and there aren’t any. I believe this ploy will work on a short-term basis, but oil prices will start to move higher.

It’s ironic that my one concern this week surrounds the strongest stock. Apple will release a new product this week and the stock accounts for 12% of the S&P 500 rally this year. Traders are likely to “sell the news” and this event could have a negative impact on the market.

Many Asset Managers have been waiting for a pullback and they are anxious. They want to rotate out of fixed income and into equities. Those who are under allocated have missed the move and they are worried.

Credit concerns have plagued the market and that dark cloud has parted. Interest rates are at historic lows and central banks are easing. It’s not wise to trade against monetary easing.

It is way too early to get bearish so don’t try to pick a top. It will take months for economic conditions in Europe and China to deteriorate. Eurocrats are “off the hook” for the time being. Months of indecision will dampen spirits and a May decline is likely.

I’ve been instructing you to keep your size small. The VIX is not jumping this morning and that tells me traders don’t believe this decline will be sustained. I am long calls on strong stocks and I am long VIX calls. If we close below SPY 135, I will sell some of my equity calls and I will buy more VIX calls.

Nothing disastrous happened over the weekend and today’s decline is very normal. The news does not justify the reaction. I suggest maintaining a “buy the dip” mentality. Wait for support and be patient.
The expectations for this week’s jobs report are not overblown. I believe we will be able to meet or beat 210,000 new jobs. Wednesday’s ADP number should attract buyers. If we get a nice dip, I might buy more calls ahead of the number.
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