Decent News and End-of-Month Buying Not Enough To Entice Buyers!

September 1, 2009
Author: Peter Stolcers, Founder of OneOption

As I pointed out yesterday, the market is vulnerable to profit taking. Last week, we had a number of positive news items and the market was not able to stage a rally. This morning, ISM manufacturing expanded for the first time in 18 months. Factory activity rose to 52.9 in August from 48.9 in July. That was much better than analysts had predicted and a number above 50 indicates economic expansion. Construction spending fell .2% in July to the lowest rate since February 2004. Public construction fell .7% while residential construction increased 2.3%. Pending home sales rose to a two-year high in July. The index rose 3.2% and it hit its highest level since June 2007. These releases had more good news than bad news and they are not the cause of today's market reversal. I expected beginning of the month fund buying to prop up prices. We still might see a bounce before the day is done, but buyers have put their wallets back in their pockets. Trading activity has fallen off and normal levels will not return for another two weeks. That means we will see choppy trading until then. As you can see in today's chart, the market has moved higher and lower, but it has not made any progress during the month of August. Initial jobless claims have not improved much in the last 3 weeks and that could be a factor as Friday draws nearer. In today's ISM number, manufacturers said that they are not likely to hire back workers anytime soon. The unemployment rate dipped last month, but it is likely to resume its path higher. We will get a sneak peek at Friday's number when the ADP employment index is released tomorrow. If job losses continue to mount, fears of a double dip recession will push this low volume market lower. That nervousness could explain today’s decline. The FOMC will release its minutes tomorrow afternoon. They are committed to keeping interest rates low and that should be a positive for the market. Traders are waiting for the first signs of an "exit strategy" from the Fed and they are not likely hear that rhetoric tomorrow. That would mean the Fed is tightening and we know they want to keep easy money in play. The breakout at SPY 101 is being tested today. It is not a major support level and I do not believe it will hold. The more important level to watch is SPY 98. If the market pulls back to that level and buyers step up, I will start selling out of the money put credit spreads on strong stocks. I only have a small portion of my desired risk exposure on at this time and I have been playing it safe. Pullbacks like the one today remind me why I took this approach. My positions are in good shape and I can calmly see if another opportunity presents itself. I would not read too much into today's price action. I don't like the fact that the market has not been able to rally on good news and I don't like today's reversal after decent economic releases. However, the trading is light and investors are taking profits ahead of Friday's number. I expect SPY 96 to hold. Earnings have been great, interest rates are low and economic conditions are improving. Wait for the market to find support and "buy the dip". Today's price action is weak and I doubt anyone will stand in the way. Decliners outnumber advancers by a four to one margin and we could see selling into the close. I would not suggest getting short unless you are day trading and taking profits by the close. The path of least resistance is still higher and bears have been carried out in body bags. Line up your longs and be patient. image

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