Nervous Trading Will Set In Next Week – Go Team USA!

February 26, 2010
Author: Peter Stolcers, Founder of OneOption

In today's chart you can see that the market has been in a relatively tight range between SPY 108 - 112 during the last four months. We had a small break out to new highs and a brief dip below that level. Bulls and Bears are fighting it out and in the next few weeks we should have a breakdown. Bulls argue that solid earnings and low interest rates present attractive stock valuations. Corporate balance sheets are strong and companies have dramatically reduced expenses. Any uptick in demand will go right to the bottom line. This is a strong argument and it is keeping the market afloat. I don't contest this, but I do question the uptick in demand. Debt levels are at extremely high levels from top to bottom (government, states, municipalities and individuals). The Fed and Treasury have thrown all they have at the problem and they are out of bullets. Fiscal conservatives are gaining traction and Americans are starting to realize our nation’s financial instability. New stimulus programs will be fought tooth and nail by Republicans. Collectively, states are $300 billion in the hole. Dramatic cost cuts and higher tax rates are right around the corner. The U.S. Constitution requires states to balance their budgets. California plans to impose a sales tax on Amazon. This is the first of many targeted tax hikes. When you can't control your spending, you have to find new sources of revenue. Oil companies and HMOs are likely to see tax increases in the near future. Personal tax rates will also rise. Americans have been spending like crazy and their last spree started in 2002 when interest rates fell. They refinanced mortgages and took out home equity loans to buy "toys" and go on vacations. That money has been spent and we are not seeing any uptick in consumption after dramatic interest-rate cuts last year. That's because everyone is tapped out. The average baby boomer has less than $80,000 saved for retirement and one out of every three homes has negative equity. Personal balance sheets are a mess. Consumption accounts for over 70% of our GDP. This morning, consumer sentiment dropped to 73.6. That's down from 74.4 in January and it was worse than expected. People are worried about their employment and they are watching their expenses. Existing home sales plunged 7.2% in January and this will keep home prices depressed. Each day I've talked about the problems in Europe and I’ll give that a rest. Needless to say, we will not see an uptick in demand from Europe either. Next week, Greece may be holding a bond auction and that will spark selling if it goes poorly. I don't believe China will pull the rest of the world out of a recession. They are keeping their stimulus "in-house". Their economy is overheated and bank reserve requirements have been raised three times this year. They are slamming on the brakes and there's a good chance they have overproduced. Last week, Korea announced that exports fell 8%. They have prospered from China's stimulus and activity is starting to slow down. Massive global debt and reckless spending by governments and consumers over many decades will limit our recovery. We have reached our limit and now we will have to pay for our mistakes. Today, GDP and Chicago PMI came in better than expected. The market took those numbers in stride. The big economic news will come in a week when the Unemployment Report is released. Leading up to it, we will get ISM manufacturing, ADP employment index, ISM services and the Beige Book. I believe we will see a rally Monday and nervousness the rest of the week. Initial jobless claims have been creeping higher the last three weeks and the likelihood of a disappointing Unemployment Report is high. Greece will also be a focal point and poor demand for its bond auction could really devastate the market. Yesterday's reversal demonstrates why I have advised you to sell out of the money credit spreads and to wait for a breakdown. The market will chop back-and-forth until it has concrete prove that the economy is slowing or a credit crisis is imminent. A massive snowstorm in New York has crippled trading desks and the volume should be very light today. I have to end the week on a positive note. The US has dominated the Olympics. Congratulations to all of our athletes. I can’t wait for the final in men’s hockey. GO TEAM USA!image

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