Lackluster Action During the Start of Earnings Season Is Unusual!

Earnings continue to exceed expectations, but the market has not had much of a reaction either way. Stocks are priced for great news and companies have delivered. In October and January, stocks sold off on the actual earnings announcement. After pulling back for a few weeks, buyers stepped in and the market resumed its rally. Normally, you can expect some fireworks during the first two weeks of earnings. There are surprises and the market whips around while it digests the news. The price action has been lackluster and traders are scratching their heads. Where will the next catalyst come from? Tomorrow, the PPI will be released. The number should be benign since it has not shown signs of inflation in recent months. Even if the number came out "hot", traders would discount it knowing that energy prices have dropped recently. Initial jobless claims could swing either way after dismal results the last two weeks. Analysts blamed the poor numbers on seasonal adjustments and they are expecting a rebound this week. Consensus estimates are for 460,000 new claims. If the number is higher than that, employment concerns will increase. Last month, employment grew by 160,000 jobs. The public sector has grown due to government stimulus and census workers. The private sector has lagged and even though companies hired workers last month, the government's figures contradicted the ADP employment index. They showed that private sector jobs declined by 23,000. The private sector is critical since government spending will start to wind down. State and local governments will also be trimming payrolls to balance budgets. Corporations should start hiring. Over two thirds of the companies that have reported exceeded revenue estimates. Productivity is high and top line growth is going right down to the bottom line. Companies can afford to hire new workers, but they see storm clouds ahead. Higher taxation, increased regulation and healthcare reform add uncertainty. They also want to see sustained demand and they want to make sure that the current rebound is not simply inventory replenishment. Traders will be inclined to "sell the news" and I am expecting some selling pressure during the next two weeks. This morning, stocks are retreating after a positive open. During this strong rally, we have typically seen buying into the close. If the market trades lower into the closing bell, we might see a market pullback in the next few days. Late afternoon selling would indicate a slight shift in sentiment. I do not expect a major decline in the near future. This is technical selling and profit-taking from an overbought condition. Bullish speculators need to be flushed out. Minor support lies at SPY 118. That level could be tested and it might fail. Major support lies at SPY 115 and I expect it to hold. If the market sells off, I will wait for support. Once it has been established, I will be selling put credit spreads on stocks that have pulled back after releasing strong results. The stock needs to have strong support and relative strength. I am long-term bearish, but the credit crisis in Europe and deteriorating economic conditions in the US will take time to unfold. By late summer we should be seeing signs of stress. Until then, sell put premium to generate income. Keep your bets small and distance yourself from the action.

Daily Bulletin Continues...