Look For Choppy Trading Next Week With A Negative Bias!

Yesterday, the market took a bit of a breather. We have run up 20% from the lows made two weeks ago and it is only natural for prices to consolidate. I believe the rash decision by the Fed to buy $300 billion worth of long-term treasuries (in the next six months) concerned traders. This is an inflationary practice used by third-world counties and it will pummel the dollar. The US Treasury will have to issue almost $2 trillion worth of bonds this year to fund the bailout and stimulus plans. They have barely started to issue those treasuries and the Fed has already discussed buying them. First, they should have gone to market with as many bonds as possible to gauge the appetite. When they reached a saturation point where interest rates started to climb, then they should have considered "printing money". This announcement was premature and they should not have let the cat out of the bag. I am completely against this practice. If printing money is the solution to all of our problems, why didn't we do it decades ago? None of us would have to work, we could just print money. This solution does not work and it will devalue our currency. Furthermore, our credit rating will suffer long-term consequences. For decades, the dollar has been deemed the most stable currency in the world and now we are willing to compromise our monetary policy. Just as Alan Greenspan overreacted to 9/11, I believe the Fed and Treasury are currently following his lead. Alan Greenspan's overblown interest-rate reductions resulted in an artificial economic expansion. Americans bought homes they could not afford, they refinanced mortgages and they took out home equity loans. In the process, debt levels skyrocketed and people went further into debt. Now, the economic conditions are worse than they were in 2002 and the actions are more dramatic. The Fed is thinking out of the box and they are taking measures that have never been tried before. These are acts of desperation. The end result will play out in a few years and conditions will be even worse than they are now. In the meantime, we will see a nice market rebound and I will play it. In the long run, we have postponed the inevitable. Just remember, a long-term debt problem cannot be fixed with more debt. Time, hard work and saving on all levels (the government, states, municipalities and Americans) are the solution. Money is power and as a nation we are broke. China on the other hand holds all of the cards and they can afford their stimulus package. They are not wasting money on social programs, they are building infrastructure to make their economy more efficient. They will create jobs and prosper. We need to maintain good trade relations and hope that they buy our products. Unfortunately, signs of protectionism are starting to show and that could destroy trade relations. Since the FOMC news, we have seen commodity stocks surge higher. They currently represent the safest bullish play in the market. As the dollar decreases, commodities (which are dollar-denominated) go up in value. Commodity producers are able to quickly adjust prices and they do well in an inflationary environment. Quadruple witching is over and the market sits at a major resistance level. I don't foresee any additional good news next week from a fundamental standpoint. Financial institutions have already calmed nerves and I don't believe they have much more they can say. Mark to market rule changes will be made and the Fed is buying $750 billion worth of mortgages this year. These were all major drivers that got us to this point. We now sit at a multiple resistance level where the downtrend, the 50-day moving average and horizontal resistance converge (SPY 81). Next week, we get durable goods orders, GDP and initial jobless claims. All were extremely weak last month and I expect the same. In the absence of any new fundamental news, I believe the market will struggle to hold this level. As the unemployment report draws closer (2 weeks), we are likely to see the market pullback and test SPY 75. I believe that level will hold. The market has historically been weak at the end of March and that will also be a factor. The market needs to consolidate at this level and we need to "mark time". As earnings season approaches, we will be search for signs of improvement. We could be headed for a trading range between SPY 75 and 81 for the next 4 to 6 weeks. Option implied volatilities are still elevated and I believe this sets up well for OTM put and call credit spreads. I will be selling some of the money call credit spreads in the next week on stocks that have bounced off of their lows and are hitting resistance levels. I will also be selling put credit spreads on commodity stocks. The expiration fireworks are over and I expect a quiet day. Look for choppy action next week with a slightly negative bias.

Daily Bulletin Continues...