Spain Won’t Ask For Aid – Yet. Still A Few Days of Selling – Keep Shorts On A Tight Leash

September 27, 2012

The market has been in a steady drift lower since the FOMC statement. Central banks have all their chips on the table and traders are searching for the next catalyst. A light round of profit-taking will flush bullish speculators out of the market and I believe we will probe for support for a few more days.

US economic releases were weak this morning. Q2 GDP (final reading) decreased .4% and growth slowed to 1.3%. This was much worse than expected. Durable goods orders fell 13.2% and this one of the worst readings in many years.

Major economic releases are scheduled next week. They include, ISM services/manufacturing, ADP, initial claims, retail sales and the Unemployment Report. These numbers will remind traders that economic conditions are fragile and the market will drift lower.

Official PMIs will also be released. China’s economic conditions are weakening and their largest steel producer will suspend output at one of its plants due to weak pricing. About 40% of China’s iron our mines are off-line. The PBOC fears inflation and they have been slow to react. China’s stock market is closed all next week for holiday and the selling pressure could build.

Spain’s Prime Minister will release the 2013 budget this morning. Pension reform and spending cuts are expected. Riots are breaking out across the country and unemployment is at 25%. Tomorrow, Spain will release the results of its bank stress test. Most analysts believe it will need $60 billion-$100 billion. If they do not request aid from the ECB right away, the market will grow impatient.

PIIGS yields are inching higher and Spain’s Prime Minister won’t be able to wait until the elections in a few weeks.

As far as the market is concerned, Europe’s problems can temporarily be solved with a printing press. Spain will ask for aid and the ECB will grant it. Germany and France want Greece to stay in the EU and they will also come to terms. Bill Gross (largest bond fund manager in the world) is buying short-term Spanish debt. Credit concerns should remain subdued the rest of the year.

Central banks are backstopping the market and Asset Managers don’t want to miss a year-end rally. Any pullback will represent a buying opportunity. We are in risk on mode and assets will shift out of fixed income and into equities.

Stock valuations are attractive and balance sheets are strong. Earnings season is two weeks away and it will provide the next catalyst. This should carry us through the election. Before 2013, politicians will strike a deal to postpone the fiscal cliff and that will push us higher into year end.

We still have a few more days of weakness ahead. The market will find support at SPY $140. Major support is at $138 and I don’t think we will get that low. The jobs reports won’t be great, but they won’t dampen spirits.

I am long SPY puts and I will exit the position if the market rallies above SPY $144.50. If we don’t get late day selling, I might take partial profits. I am just playing a quick little reversal and I don’t want to get cute. If you are short, maintain tight stops.

Swing traders, stay on the sidelines and wait for support. Line up your bullish candidates and get ready to buy this dip.

I don’t think the market will like Spain’s budget and I think that the stress test will be worse than expected. They won’t ask for a bailout and the market won’t like it. Stocks will decline into the weekend and this next wave of selling will flush out bullish speculators. Official PMI’s will be released Monday and that will also weigh on the market. A low will be established and that support level should hold.

Things don’t always happen according to plan and that is why you need to maintain stops.

The next big move will be higher. Be patient and buy the dip.
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September 26, 2012
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