The Market Looks Weak – Expect Selling Into The Close!

Yesterday, the market was very quiet and we did not get the typical Monday rally that we have seen recently. Overseas markets were mixed and M&A activity was light. This was a good backdrop since we could watch the price action unfold throughout the day without any outside influences. In the last hour of trading, the stock market drifted lower. As I mentioned in yesterday's commentary, this is exactly what we have been looking for. The warning signs are everywhere and the market is hitting stiff resistance. Each time it has tried to break out to a new high, profit-taking has set in. We are in a seasonally bullish period and the market should have pushed higher with ease after a phenomenal Unemployment Report. When this failed to materialize, nervous investors/bears took notice. Bears will gain confidence with each passing day and the selling pressure will mount this week. Today, news of a credit downgrade in Greece is weighing on global markets. This is another reminder that the financial crisis is far from over. The PIIGS markets (Portugal, Ireland, Italy, Greece and Spain) are very weak. The entire EU was on the brink of collapse when a few Eastern European countries (Latvia, Bulgaria) failed to get capital from the European Central Bank earlier this year. Conditions have stabilized, but they are far from good. A major explosion in Iraq killed more than 100 people this morning and uncertainty in the Middle East has pushed the dollar higher. The surge in Afghanistan, conflict in Iraq, nuclear expansion in Iran and financial distress in Dubai are prompting a flight to safety. The dollar carry trade (short the dollar) is very crowded and shorts are running for cover. This will weigh on commodity stocks. The news releases this week are very light. Resistance is firmly in place and now that prices have started to roll over, I expect to see selling pressure the next two days. I have been selling out of the money call credit spreads on weak stocks and I have been buying puts. Support at SPY 108 will be tested. As long as SPY 106 holds, I will maintain a neutral bias (I am no longer bullish). If the uptrend is tested and it holds, I will take profits on my short positions. If that level fails, we could see a sharp decline and I will stay short. This is normally a very bullish time of the year and a breach of major support would indicate extreme selling pressure. If the uptrend line holds, we could see a nice light volume rally at year-end. If enough bears get sucked in, shorts will cover and we could test the highs on light volume. Stay short and let the market run its course. For today, I expect to see selling into the close and we should finish in the lows of the day.

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