SPY 80 Should Hold This Week – Option Expiration Could Be Bearish!

Last week, the market was remarkably resilient after a horrible Unemployment Report. The jobless rate spiked from 7.3% to 7.6% and the acceleration signals trouble ahead. President Obama was quick to react and he challenged Senate Republicans. The stimulus plan had not been approved and his calm demeanor changed during his speech. Many politicians speculated that the rhetoric would motivate Republicans and plan would be approved before last weekend. The new Treasury Secretary was slated to outline his new plan of attack for the financial crisis this week and both of these events kept shorts at bay. The pattern of selling into the Unemployment Report became a little too predictable and shorts were squeezed last week. Tuesday, we learned that the new financial bailout would purchase $500 billion of toxic assets and that $1 trillion would be used to beef up bank balance sheets. When Geithner presented his plan, the market tanked. He was blatantly honest and he said that they would learn as they go and that mistakes would be made. It's been almost a week and the stimulus plan has still not been approved. The House and Senate are close and it is likely to pass next week. Approximately 36% of the $800 billion package will go to tax relief. I'm not sure how $400 ($800 per couple) is going to create 4 million jobs. Last year's tax rebate did nothing to stimulate consumption. The other 64% will go to spending. An increase in unemployment benefits, an increase to Social Security recipients and $50 billion in state aid are some of the major allocations. Only about $50 billion will go to new construction. Although I do not agree with the stimulus plan, is likely to keep a bid under this market until it passes. This morning, jobless claims came in at 623,000. That was higher than analysts had expected and the four-week average stands at 608,000. Continuing claims rose to 4.8 million, the highest total since records began in 1967. As Americans lose work, they are less able to finance their debt. This week we learned that credit card default rates rose to 7.5%. That is a 40% year-over-year increase. Unemployment also impacts our nation’s budget deficit since tax revenues decline and transfer payments increase. This could jeopardize out AAA credit rating. We will be testing the outer boundaries of our credit worthiness this year. Our national debt as a percentage of GDP is 12% and that is twice as high as the previous extreme. As the appetite for US debt decreases, the cost of capital will rise. The Fed is prepared to buy treasuries to keep interest rates down. That is an inflationary practice known as “printing money”. One we head down this road, the dollar will collapse. This is a three-day weekend and the selling momentum favors the bears. Asian markets were hit hard overnight and that set a negative tone for our market this morning. A better-than-expected retail sales report did not rally the market. Next week options expire and since we are at the low end of the one-month trading range, the bias will be negative. SPY 80 needs to hold or we will see another down leg. This one is likely to be much more gradual and sustained. Most of the speculative and nervous money has been washed out so big declines should be contained to one day events. If the market is able to establish support at SPY 80, we might see a meaningful bounce. Worse case scenarios have been priced in and the kitchen sink has been thrown at the credit crisis. We don’t have to worry about financing the programs for a few months since the treasury auctions should fare well early on.

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