Take A Cautious Approach Until the Market Breaks Out or Rolls Over!

If not for a big rally in the waning minutes of yesterday's trading, the market would have posted a very quiet day. It tested the downside early and recovered nicely. As I look at the price action, volume has dried up and the moves are choppy. Traders are relatively quiet and they are waiting for a move in either direction. As you can see in today's chart, the momentum has slowed and the market is bumping up against resistance. Earnings could be the catalyst to push us through. Unfortunately, the results so far have been decent but unimpressive. CEOs are very cautious and they are not providing guidance. The visibility is low and Asset Managers will continue to nibble, but they won't aggressively chase stocks until they have more evidence. If the market breaks out, a short covering rally will ensue. If the market rolls over, bears will apply pressure until a support level is established. That would form a higher low and it would be intermediate-term bullish. Either way, I believe the downside risk is relatively contained. This afternoon, traders will assess the criteria used by the government in its "stress test". The largest banks in the nation (19) are being evaluated. The government doesn't want to whitewash the results and make them seem better than they are. The market would see right through this. I do expect the government to error on the lenient side. With private equity running scared, the government wants to add transparency in hopes of regaining confidence. Outside of a handful of banks, the government has been the only source of new capital to the financial sector lately. If the results are poor, fear will spread and banks that don't pass will be in danger of losing depositors. Most of the really big earnings are out of the way. Tech has been leading this rally and Google, Intel, Amazon, RIMM, Apple, Yahoo, Microsoft and eBay have all announced. That means that from an earnings standpoint, much of the firepower is gone. Bank stocks produced decent results, but the outlook is very concerning and all of them expect weak conditions the rest of the year. Cyclical stocks have reported meager earnings, but the stocks have held firm and in some cases they are gradually moving higher. As I look to the week ahead, I don't see any major earnings that would drive the market during the first two days. Over 25% of the stocks in the S&P 500 have reported and the market knows what to expect on a sector to sector basis. There will be many economic releases and a Fed meeting on Wednesday. I expect the market to continue to sort things out and I won't be taking any big positions until I see a breakout above SPY 87.50 or a decline below SPY 83. I am still selling out of the money puts and that strategy has been effective for the last six months. I currently have about one third of my position on. Advancers led decliners by a 3 to 1 ratio and it looks like today's rally could last into the close. The market might get nervous towards the end of next week. All eyes will be on the actual release of the "stress test" results on Monday, May 4th. If initial jobless claims come in high on Thursday, we could see a pullback heading into the weekend. Trade light and distance yourself from the action. Try selling out of the money puts on companies that have released good earnings and are moving higher after the announcement.

Daily Bulletin Continues...