JP Morgan and Jobless Claims Will Fuel A Rally Today!

April 16, 2009
Author: Peter Stolcers, Founder of OneOption

This has been a relatively quiet week with choppy action on both sides of the market. The SPY has rallied to resistance and the headwinds are blowing. Early in the week, earnings from Goldman Sachs weighed on the market. They beat expectations; however the majority of their profits came from trading. Most banks don't have that source of income and it was viewed as negative for banks that will be announcing next week. The financial sector has rallied well off of its lows and there is room for disappointment. Retail stocks have also rebounded nicely and they were hit after a 1.1% drop in March sales. That came after two consecutive months of growth and the decline was unexpected. Wal-Mart forecasted tough conditions for the rest of the year. Wednesday, the Beige Book showed that economic conditions were not deteriorating as quickly as they have in prior months. The market was able to stage a late day rally and we are within striking distance of the two-month high. The news this morning was bullish. J.P. Morgan posted a $2.1 billion gain compared to $2.37 billion last year. Profit was largely driven by investment banking. Credit card and consumer debt is weighing on the company and they expect credit card default rates to rise to 9%. The bank has a solid balance sheet and it has reduced leverage to 4.3% (tangible common equity to tangible assets). It also believes it can repay the $25 billion it borrowed from the government. This morning, initial jobless claims fell 53,000 to 610,000. One week does not a trend make, however if we see signs of improvement in the job market, that would fuel this market much higher. Continuing claims reached a new record and more than 6 million Americans are still trying to find work. The Philly Fed index rose from a -37 last month to a -24 this month. It measures manufacturing activity in the Philadelphia region and although the reading was dismal, it did improve month over month. After the close, we will hear from Google. I expect those results to be good and tech stocks should rally. However, I’m a bit concerned with tomorrow's releases. Citigroup will post its earnings and good results are expected. Most of its profit during the first two months came from AIG payments it had written off. It also mentioned that March was not a particularly strong month. General Electric will announce earnings before the open. They are very consistent and I'm not expecting any surprises there. Last month, they said that GE Capital will make money if the Fed's 2009 economic forecast holds true. Next week we will be inundated with earnings announcements. It all kicks off Monday morning with Bank of America. Financial stocks have rebounded off of their lows and I believe the market is set up for disappointment. American Express, Zion’s Bancorp, Bank of New York, Northern Trust, U.S. Bancorp, Morgan Stanley, Wells Fargo and a host of other banks will release earnings. With the exception of durable goods orders, the economic releases are fairly light. All eyes will be on earnings and Q2 guidance. A small rally today could spark option expiration buy programs. I had expected more of a rally this week. We've heard from two of the best banks in the financial sector and I thought that would get things moving. Bulls need to prove their conviction in the next two days in order for this rally to continue. The momentum is starting to fade and bears will gain confidence with every passing day. I believe the news today and the bullish expiration bias will fuel a rally this afternoon. Advancers led decliners by 3 to 2 and institutional traders will leg out of hedged positions if they sense a rally. That will "goose" the market. Depending on the size of the rally today, that buying could spill over into tomorrow. Next week I am more bearish. The financials are a bit stretched at this level and I believe they will give back some of their recent gains. That will weigh on the market. I am evaluating out of the money call credit spreads on weak stocks that have rallied to resistance. If the SPY stays below 90, I will start scaling into positions. I am not overly bearish (short-term). I believe the market will pull back and form a higher low in the next few weeks. It is likely to rally from that level and it could make a new relative high. Daily Report subscribers use the Live Update table as your guide. There are lots of great stocks on both sides of the market. image

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