The Market Should Find Support Today – Look For A Bounce Next Week!

October 2, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market sold off on a weak initial jobless claims number. Once the downward momentum was established, profit-taking set in. The SPY broke below support at 105 and it closed near its low of the day. More than 90% of all stocks traded lower. When I dissected the news, it wasn't dire enough to justify such a huge decline. While it's true that jobless claims increased by 17,000 (when a decline is expected), all of the other news was fairly positive. Continuing claims dropped by 70,000, planned job cuts by employers fell 13% from August, the four-week moving average for initial jobless claims (widely followed because of week-to-week volatility) fell by 6000. Other economic news was also decent. Consumer spending rose 1.3%, the largest gain since 2001. Construction spending was up 1.8% in August and private residential construction was up 4.7%. Pending home sales were up 6.4%. My conclusion is that nervousness set in before the Unemployment Report and traders wanted to take profits. As the trading day unfolded, Goldman Sachs lowered its estimates for the Unemployment Report and projected to decline of 250,000 jobs when they were previously looking for a decline of 200,000 jobs. That accelerated yesterday's selloff. As you might expect, their number was pretty close. This morning, the Unemployment Report showed a loss of 263,000 jobs in September and the unemployment rate rose to 9.8%. Analysts had been looking for a loss of 180,000 jobs and this was a considerable miss. Many analysts have been calling for a double dip recession and this has traders thinking about that possibility. I tend to agree with that school of thought, but I still feel we have another leg up before that haunts us. Most of the bad news was factored in during yesterday's decline and the market has been able to find support this morning. We did lose 60,000 jobs compared to August's number, but September's number was still better than July's number. Gradual economic improvement and stabilization are important to this rally. As long as the economic numbers hold up, earnings and interest rates will drive the market higher. The Fed is committed to keeping interest rates low and earnings season will fire up next week. Financial institutions will dominate the first two weeks of earnings releases and their results should be very encouraging. New equity and accounting rule changes are allowing banks to sit on their toxic assets. This means write-downs should be contained. The spread between the borrowing and lending rate has never been better and banks should post big profits. This recession is more than a year old and all companies should benefit from favorable year-over-year comps. If enough traders pile into this decline, we could see a short squeeze that fuels us to another new high. As I've been saying, Asset Managers are still looking to "buy dips" and they are supporting the market today. M&A activity has picked up and I doubt that we will see a major decline today, especially after this week’s “Merger Monday” rally. I expect to see support somewhere above SPY 100. The biggest economic release next week comes Monday morning. ISM services is expected to increase to 50.0 from 48.4 last month. That would mean we are on the brink of economic expansion in the service sector. This is critical since the service sector accounts for 80% of our economic activity. A breakdown below SPY 100 will tell me that my forecast is wrong and I will need to exit bullish positions. I expect to see support around SPY 102 with the chance for a bounce early next week. The market might probe lower levels throughout the day, but look for a decent finish in the last hour. I will sell out of the money put credit spreads once support is established and I will add another third of my capital to those positions. Even with the pullback, my current positions are still in good shape and I only have a third of my desired position at this time. Be patient. image

Daily Bulletin Continues...

Want Full Access?

Become a Member

Start Free Trial

No credit card required.


Previous Bulletin

October 1, 2009

Next Bulletin

October 5, 2009