Resistance and Nervous Trading Ahead of News Should Keep A Lid On The Market!

May 5, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market posted a huge rally and it broke through key resistance at SPY 90. China posted its first PMI number over 50 (indicating economic expansion) in many months. Chinese officials also said they expect Q2 growth of 7%. Asian markets rallied and that provided a nice spring board for our market Monday. Pending home sales rose 3% and as soon as the number was released, the S&P 500 futures rallied 6 points. The bears ran for cover and the short squeeze was on. US regulators have determined that about 10 of the 19 stress test banks will need to add capital. They have one month to comply. We won't know the full extent of the report until Thursday, but this gives traders some idea of what to expect. It is rumored that Bank of America needs to raise $10 billion and they are already trying to do so. This additional capital is supposed to cover "worst-case scenarios". The fact that more than half of the banks need more capital comes as a surprise. Analysts (me included) thought that only a handful of banks would fail the stress test. The market is extremely resilient and it has shouldered the news well. The Fed Chairman is testifying before Congress and he said that the recession will end soon, but the recovery will be slow. Once again, the market has taken his comments in stride. It is much easier to deal with a slow recovery than it is a financial collapse. For that reason alone, stocks have rebounded sharply from their March lows. Earnings continue to roll in ahead of estimates. Almost 70% of the companies that have announced have beat analyst expectations. There is a chance that we will see upward earnings revisions heading into Q2. ISM services came in better than expected this morning. It showed a slight increase from 40.8 last month to 43.7 this month. Analysts were looking for 42.2. A number below 50 still indicates contraction in the service sector, but conditions are improving. Tomorrow, traders will be watching the ADP employment index. It might indicate where the Unemployment Report will come in Friday. During the last four months, the Unemployment Report is not caused a market selloff even though it has been dismal. Bulls have argued that it does not reflect current conditions. Consequently, the market is not likely to drop even if the number is bad and we can expect a silver lining somewhere. Perhaps the rate of acceleration will decline and that will be the focal point. Thursday, the government will release the findings from its "stress test". Nervous trading lies ahead, but I believe the market will be able to recover from a brief decline. Buyers are continuing to step in and for the first time in many months, they are chasing stocks. That aggressive behavior tells me that this move still has room to run. I do not want to chase this market. I still prefer to sell out of the money puts on strong stocks. I am long a handful of calls in the commodity sector and the stocks were poised to run much higher. Be patient and wait for your entry points. Use stops and take profits along the way. Beware of stocks that are highly leveraged and are rallying because of a short squeeze. Gaming stocks are one example. These plays will make great shorts once this rally exhausts itself. For today, decliners outnumber advancers by a 2 to 1 margin. I expect profit-taking during a relatively quiet day. image

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