Great Earnings News Was Not Enough To Fuel A Breakout To New Highs. Heavy Price Action!

October 26, 2009

Last Friday looked like it had the potential to be a strong day. Good news from Amazon, Microsoft, Capitol One, American Express, Ingersoll-Rand and Honeywell should have provided a bid to the action. The S&P 500 did not jump higher on the open and that was a little suspicious.

As the morning progressed, profit-taking set in. Two of the last three days have been negative with heavy selling pressure. This morning, the market moved higher on news that South Korea’s GDP rose faster than expected. That provided a boost for Asian markets and it seemed we would be off to a positive start. Prices are starting to slip and we are in negative territory.

Earnings have been strong and almost 80% of the companies have exceeded expectations. One third of the S&P 500 has reported and this will be another heavy week of earnings. Before tomorrow’s open, BIDU, CF, DRYS, EPIQ, MAS, VFC, WMS, AKS, CRS, BEN, PCAR, SCHN, X, UA, VLO, and WYNN will release. Overall, I think the results will be mixed and the market will struggle to hold its ground.

The economic releases this week will be highlighted by GDP. Analysts are expecting a 3% increase and that rebound could help to justify the market’s current price level. Economic conditions have gradually been improving and that needs to be reflected in the numbers. Durable goods orders are volatile and that number will cause a reaction, but the move tends to be temporary (good or bad). The cross currents are strong and volatility will pick up this week.

The price action is heavy but I would not classify this as a battle between bulls and bears. Asset Managers are still trying to place money and traders are taking profits after a nice run. If the market loses its momentum, Asset Managers will step back and they will wait for a better price level. Once that support level is identified, they will step back up to the plate. From a technical perspective, that will form another higher low.

I feel that the market will fall below its recent breakout and it will find support around SPY 104. A three-month uptrend line and the 50-day moving average should attract buyers at that level. That will set us up for a nice little year-end rally.

Interest rates are low and as long as unemployment is on the rise and inflation is muted, the Fed will not feel any pressure to tighten. Earnings have been very good and I can’t imagine a major selloff under these conditions. If SPY 102 is breached, I will abandon my “buy the dip” approach. I still favor selling out of the money put spreads, but I am also selling some out of the money call spreads.

Look for a pullback during the next week or two as Asset Managers get less aggressive and wait for stocks to come in. As I have been stating, the easy money has been made and you need to recognize the “two steps forward, one step backwards” pattern that has prevailed the last few months. Line up your strong stocks and wait patiently for a put selling opportunity.
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