Take Your Sweetheart to Lunch and Day Trade Strong Stocks Into the Close. Tight Range Continues

February 14, 2012

The market is searching for direction and it will take a major news event to break us out of this range. Shorts tested the downside on Friday and they weren’t able to get anything going. Yesterday, the market rebounded and we are back to ground zero.

Stocks have fallen into a pattern where they open weak and rally late in the day. That pattern should repeat itself today. The overnight news was pretty good and this decline should reverse itself.

European events were mixed but in line with expectations. Industrial production across the EU declined more than expected. This could weigh on the Euro zone GDP number tomorrow. Bond auctions in Italy and Spain went well. These were shorter-term durations and banks will sponsor maturities of 5 years or less. In a couple of weeks, the ECB will conduct another liquidity injection and that should support sovereign debt auctions.

The situation in Greece will continue to fester. For the time being, traders don’t seem to mind. In fact, they shrugged off a Moody’s downgrade across Europe. S&P released its downgrades a month ago and this news was priced in. Nine EU members were downgraded by Moody’s overnight and that is why the market is soft this morning.

China’s Director of the Pricing Department said inflation will fall below 4% in February. This is the lowest rate in 17 months and it could pave the way for easing. Bank regulators are already considering a reduction in bad loan reserve requirements.

Inflation in India also declined. Wholesale prices climbed 6.55% and that was down 7.47% in December. This is the lowest level in more than two years.

The Bank of Japan announced that it will conduct quantitative easing. This is another “warm fuzzy” for bulls to latch onto.

Tomorrow’s events include Euro zone GDP, Empire Manufacturing, industrial production and the FOMC minutes. Germany’s industrial production declined and that could weigh on the GDP number. Once again, we will open to the downside and rally late in the day. Our domestic releases should be positive. The FOMC stated that it will maintain a zero rate policy through 2014 and the minutes should be bullish.

Earnings season is winding down and that will not provide any action in either direction.

President Obama’s budget was exactly what traders expected. Spending cuts will be minimal and any deficit reduction will come primarily from tax increases. Rumor has it that Republicans are caving in and payroll tax credits will likely be extended through 2012. This would be a bullish outcome and the news will hit in the next two weeks.

On the bullish side of the ledger, stocks are attractively valued and European credit concerns have waned. On the bearish side of the ledger, economic conditions in China/Europe are tenuous and the market is bumping up against major resistance. These two opposing forces are keeping us in a tight range.

The news calendar will pick up in two weeks and so will the action. Until then, I am long calls on strong stocks and I’m hedging that position with VIX calls. If the market declines, I will have time to get out of my bullish positions and my losses will be offset by my VIX calls. If the market breaks out, my long call positions will make money. The VIX is right on support and it won’t go down much even if the market breaks out.

I consider this to be “no man’s land”. This is a time to keep your positions small. Option premiums are cheap and I suggest you avoid selling strategies. This is a time to be long premium.

Bears will not be able to get anything going today. The news is fairly good and we should see an afternoon rally. Take your sweetheart to lunch and day trade a few strong stocks into the close.
image


Previous Bulletin

February 13, 2012

Next Bulletin

February 15, 2012
Top