The News Picks Up Next Week. Euro and Asian PMIs Were In Line – Another Quiet Day.

February 22, 2012

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The overnight news was benign and the market feels like it will have another lackluster day. Asset Managers want to buy dips and they are keeping a bid under stocks. Heavy overhead resistance is prompting other investors to take profits.

Credit concerns in Europe have subsided. The ECB has temporarily calmed the waters, but EU officials need to take action. Structural debt problems created massive deficits and these issues have not been addressed. Eurocrats were supposed to draft fiscal policies for the entire EU and the plan was going to be passed in March.

That deadline will come and go quickly. Half of the EU is already under water and any meaningful fiscal policies will not get the required unanimous approval.

Portugal is asking for the terms of its bailout to be revised and Spain is asking for more room on its deficit spending this year. The underlying problems still exist and they will plague the market until the house of cards comes crashing down.

Next week, the ECB will provide another massive liquidity injection. Most analysts believe that banks will gobble up $500 billion in loans. This maneuver should keep a bid under sovereign bond auctions, but the demand will be limited to short-term maturities.

With credit concerns off the table, the focus has shifted to economic releases. Europe posted its flash PMI and it came in as expected at 49.7. France and Germany are treading water and the rest of the EU is struggling.

China also released its flash PMI. It came in at 49.7 and that was in line with expectations. Over the weekend, China lowered bank reserve requirements and that encouraged investors. There is also talk that Shanghai has eased some of its home purchase restrictions. The news has generally been positive, but it’s important to realize that the actions were taken to fend off economic contraction.

Earnings season is winding down. Wal-Mart missed estimates but Macy’s and Home Depot beat. Overnight, Dell disappointed investors and the stock is down slightly. Retailers will dominate the earnings scene this week and I believe the results will weigh on the market slightly. Stores were open longer and huge discounts will reduce profit margins.

Next week, the European summit, the ECB liquidity injection, Bernanke’s testimony before the House, PMI’s in Europe and China, and a slew of domestic economic releases will drive the market. The Unemployment Report will not be released until March 9 and that is shaping up to be a good number.

The Fed, the Bank of England, the ECB, the Bank of Japan and the Peoples Bank of China are all easing. I won’t fight lose money and low interest rates. I am long calls on strong stocks and I am long VIX calls as a hedge. My bullish positions are making money and the VIX is not declining. This strategy is working well. My risk exposure is relatively small.

Look for a quiet day of consolidation. I am not expecting much movement either way. Initial claims have been beating estimates and another good number could spark buying tomorrow.
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