Regulation, Initial Claims and Greece Spoil The Party. Look For Selling This Afternoon!

This week, the market has digested a slew of earnings news. Major companies from every sector have posted results and in general, they have been excellent. Of the companies that have reported, 65% have exceeded revenue expectations and 80% have beaten earnings estimates. The guidance has also been good. This news was already priced into stocks and the market expected robust results. In October and January, the market rallied ahead of earnings season. Once the actual results were posted, stocks pulled back. We are seeing that same pattern unfold this quarter. The market hit its high just before the start of earnings season. Many companies are beating estimates, yet the shares are down after the release. In the prior two quarters, stocks found support and they rallied towards the end of earnings season. Those moves in November and February took the market to new relative highs. Great earnings, strong balance sheets and low interest rates are likely to attract buyers. The market will experience selling pressure during the next two weeks, but it should rebound. Before I start sounding bullish, I need to be clear. I am bearish longer term. From a fundamental standpoint, the headwinds will start blowing in a few months. Companies are reluctant to hire because they see increased regulation (particularly in the financial sector), higher health care costs and rising tax rates. Companies want to see sustained demand and they want to make sure the recent economic rebound is not simply inventory replenishment. Consequently, private sector jobs have been slow to recover. This morning, initial jobless claims came in at 456,000. That was slightly better than expected, but it was not a strong number. This is the third week in a row that we have seen dismal employment figures and the four-week moving average is moving higher. In the next few months, the government's stimulus (including census workers) will wind down. Furthermore, state and local governments will reduce payrolls to balance budgets. This will have a negative impact on employment. The Greek credit crisis continues to escalate. This morning, the deficits in Greece and Ireland were updated and they are much bigger than originally projected. Interest rates on two-year Greek bonds hit 11%. The PIIGS will be auctioning over €200 billion in debt over the next few months and low demand would spark fear of a European financial crisis. Deteriorating employment in the US and the threat of a European credit crisis will take months to unfold. The market has strong momentum and it has been able to discount bad news. That is likely to continue in the near term. I am expecting "soft" price action over the next two weeks. Traders will "sell the news" and take profits. Bullish speculators will be flushed out and the market will find support above SPY 115. That will represent a good short-term buying opportunity. Towards the end of summer, unemployment, a European credit crisis, higher taxes and rising interest rates will weigh on the market. There will be good shorting opportunities during the next two weeks. As long as the SPY stays above 115, don't get too aggressive. A breakdown below SPY 115 would be VERY bearish since that is a major support level. If that happens, you can aggressively buy puts. I am not expecting this to happen – yet. Expect the market to find support in the next few weeks and start selling put credit spreads on strong stocks that have released great earnings. Make sure there is strong support between the stock price and the strike price. Keep your size small. We are in the final stages of this rally. The best trading opportunities will come on a sustained decline later this year. Your goal should be to reduce risk and generate income while you wait for conditions to deteriorate.

Daily Bulletin Continues...