Market Down On Credit Concerns In Europe/US. A Close Below SPY 130 Is Bearish

The market was on shaky ground well before the open. Overseas weakness started in Asia and it spread to Europe. The S&P 500 futures were down eight points when Standard & Poor's lowered its outlook for the US to negative. In an instant, the futures dropped another 15 points. China raised its bank reserve requirements by 50 basis points. This move was largely expected and it is the fourth time they've done so this year. As we saw in China last week (GDP, retail sales and industrial production), economic conditions are strong and they are trying to get ahead of the curve. Given the short intervals between tightening, I believe there is more to come. Any decline in China's economy will impact global markets. Finland will continue to contribute to the EU bailout fund. However, there was strong opposition to Portugal's bailout during the elections this weekend. Conservatives who are opposed to the bailouts won enough votes and they will have a voice in the government. Overall, this news was better than expected. European officials are commenting on Greece's dire situation and many believe that a debt restructuring is imminent. The EU is conducting a study and it will reveal the results in June. If it believes the debt is unsustainable, it might require restructuring before additional aid is granted. This would mean considerable investment losses for European banks. The UK is contributing to the EU bailout fund. However, they stated that their participation will end in 2013. They have fiscal issues of their own and aggressive austerity programs have been implemented. This is the sign of things to come. In the next few years, the EU will become fragmented and each country will fend for itself. In the US, massive debt levels are also an issue. With great difficulty, the 2011 budget was passed last week. President Obama ripped into the Republicans budget proposal for 2012 and the battle lines are drawn. Friday, the House voted to pass Paul Ryan's proposal to cut $6 trillion over the next 10 years. The effort was symbolic and it will get shot down by Democrats when it goes to the Senate. Both parties have a different approach to balancing the budget and a rift has emerged. The debt ceiling will be reached in a few weeks and both parties need to focus on getting it raised. Standard & Poor's is concerned that it will become a political battleground and that there is a chance it won't get raised in time. That is why they downgraded our credit rating this morning. Politicians need to be aware of the havoc they will create for equity markets if they can't reach an agreement. I believe that Republicans and Democrats will raise the debt ceiling in a couple of weeks. The market will like the news and the 2012 budget will become the new battleground. Earnings releases will be fast and furious during a holiday shortened week. Tech and financials will be the focus. The banks have been trading lower after posting good numbers. The market is not satisfied with the quality of earnings since they are boosted by bad loan reserve reduction. ORCL had solid results and the stock is down because of the market, not profits. IBM and INTC will be critical for the tech sector. The SPY is below support at $130 and that is a negative sign. We need to see if this knee jerk reaction to the news gains traction. If you bought calls on stocks that were breaking out last week, I would stick with the position until the close. If the SPY closes below 130 - get out. Most of these stocks are weathering the storm pretty well. Given the price action since AA announced last week, the earnings rally could be pretty weak. The numbers will be solid, but there are too many outside influences (ECB/Chinese tightening, the end of QE2, the debt ceiling, EU bailouts, cautious guidance, and inflation). If I am forced out of my call positions today, I will stay on the sidelines for a day or two while I watch the price action. In particular, I want to evaluate earnings, the guidance and the market’s reaction to the results.

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