Lackluster Trading In A Tight Range. Action Should Pick up Next Week!

February 23, 2012

Once again, the overnight news is not moving the needle. The market is in search of any event that might break us out of this tight trading range. Asset Managers will buy dips, but they won’t chase stocks below a major resistance level. Each time we try to move higher, a light round of profit-taking sets in.

Initial jobless claims were in line this morning and economic conditions in the US are improving. They are more tenuous in Asia and Europe. The EU lowered its growth forecast for 2012 and that was largely expected.

Credit concerns have been pacified by the ECB and now Eurocrats will try their hand during an EU summit. They plan to forge fiscal policies for member nations, but I don’t believe they will be successful. With each passing month it will become apparent that they can’t address the structural problems that created the credit crisis.

Next week the ECB will provide another massive liquidity injection. Most analysts believe it will be $500 billion and the ECB’s balance sheet will expand to its highest level ever. European banks could be running out of eligible capital and if the number is considerably less, that might be a concern. Some analysts would view that as a positive sign since banks will have satisfied their needs. I am a bit more skeptical.

Either way, the additional liquidity will aid short term European bond auctions. That means interest rates in Spain and Italy should be stable for at least another month.

The Fed, the ECB, the BOE, the BOJ and the PBOC have all eased. It’s not wise to trade against central banks.

The event calendar will pick up next week and there are many domestic economic releases. The Fed Chairman will testify before the House and that could also have a market impact if deficits/QE3 are brought up. The US economy is on sound footing and I don’t believe QE3 is on the table.

In the last two days, Hewlett-Packard and Dell have disappointed. This news could weigh on the tech sector. Retail earnings have been mixed. The pie has not grown and they are stealing market share from each other.

I still have a long bias. Negative news is hard to find and I don’t want to fight loose monetary policy. Buy calls on strong stocks and hedge the position with VIX calls. Alternatively, you can buy puts on weak stocks as a hedge. Option premiums are cheap and I would not advise credit spreading.

Look for quiet trading into the weekend.
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February 22, 2012

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