The Bulls Are Losing Their Grip On This Market – Afternoon Decline Possible!

April 15, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market suffered a small set-back. Goldman Sachs released better than expected results, but it surprised the market with a secondary offering. GS was able to raise capital and they plan to pay back the money they borrowed from the government. On the surface, this all seemed like good news. A closer look revealed that much of the profits came from trading. Most other banks don't have this source of income and they will not be able to match Goldman's results. The financial sector has rallied way off of its lows and it is vulnerable. Tomorrow, we will hear from J.P. Morgan. Those results should be good. Friday, we will hear from Citigroup and that number scares me. AIG payments that it had written off accounted for most of the profits during the first two months. It stated that March was not particularly strong. They have $350 billion in toxic assets and we could see major write downs. Yesterday, retail sales came in weaker than expected. After two consecutive months of gains, sales declined by 1.1%. Consumers are not ready to pull out their wallets when conditions are still deteriorating. The retail sector has rallied sharply off of its lows and these stocks are overbought. Wal-Mart said that they are doing well in this environment, but that tough economic conditions could persist for a long time. CapitalOne announced that credit card defaults have risen to 9%. That is an increase from 8.2% last month. As long as the unemployment rate continues to climb, we can expect more defaults. Intel released better-than-expected earnings, but it did not provide guidance. It did say that there are signs of a trough in the PC market. Tech stocks are still down on the news. The Empire Manufacturing Index showed signs of improvement, but the number was still negative. This afternoon, the Fed will release the Beige Book. It is likely to show continuing economic deterioration. The bulls have been able to discount economic releases, saying that they are backward looking. However, some of the excitement in the market is fading and bad news is likely to dampen spirits. The bulls needed to push the market higher early this week and that has not happened. Traders are selling ahead of financial releases knowing that decent results are expected. The chance for a disappointment looms and they will error on the side of caution. One of the early signs of an economic recovery will come from a draw in oil inventories. This morning's number showed that we are still near all-time highs. That number changes quickly and it is one of my fundamental barometers. I am skeptical any market rally that does not include a rise in oil demand. In today's chart you can see that the momentum is slowing as we approach resistance. Every day that the market does not rally, the bears gain confidence. We will not see the rally I was looking for this week. It needed to happen right away and yesterday's action was destructive. Option expiration buy programs are not likely to be a factor since the market is starting to weaken. I don't like today's price action and I am starting to sell out of the money call spreads on financials, retail and restaurant. These stocks have rallied dramatically from oversold conditions and they are ahead of themselves. I am not overly bearish (short-term), but I believe this resistance level will hold for a few weeks. The market needs to decline and establish a higher low before it can make another run. As that happens, my call spreads will gain breathing room. For today, the market feels like it will drift lower this afternoon. The Beige Book is likely to generate selling pressure. image

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