Light News Till Friday. Stocks Will Try To Recover But Buyers Lack Conviction.

July 11, 2012

I expected a soft patch this week ahead of China’s economic releases, but yesterday’s pullback was a bit of a surprise. Stocks started off on a positive note and buyers quickly pulled their bids. The selling momentum accelerated late in the day and the SPY rested at minor support ($134).

Cummins was the biggest catalyst. It does a lot of business in South America and Asia. Revenues were projected to grow 10% this year and deteriorating conditions prompted them to change their forecasts. Now they expect revenues to be flat. They cited weak conditions in China and cyclical stocks took a beating yesterday.

Asset Managers will bargain hunt, but they will not chase. They will keep their wallets in their pockets until China’s economic releases have been posted. Thursday night they will release industrial production, retail sales, new loans and GDP. After yesterday’s market decline, I believe most of the bad news is priced in.

If conditions in China are not disastrous, the market will rebound. The PBOC has been quick to ease and investors will look for immediate action if activity drops. Any surprise favors the upside.

J.P. Morgan and Wells Fargo will post earnings Friday morning. The trading losses are already priced in for JPM and with that exception, the reports should be decent. These are two of the strongest banks in the country and they will set the tone for the entire sector.

Earnings season kicks off next week. Stocks have a tendency to rally into earnings season and shorts will not be aggressive. Tech stocks have been beaten down and Intel, IBM, eBay and Microsoft should stop the bleeding.

Conditions in Europe are tenuous. As long as Eurocrats keep talking about bailouts and a centralized banking authority, credit concerns should be kept at bay. That will allow traders to focus on earnings for a couple of weeks.

Stocks should be able to rally above SPY $136. Corporate balance sheets are strong and valuations are attractive. This rally will last about two weeks and then cautious guidance will weigh on the market.

I am selling out of the money put credit spreads on companies that do most of their business in the US. I don’t want to be exposed to weak economic conditions in China and Europe. I am keeping my size very small and I will be ready to reel these positions in at the first sign of trouble. I feel like I have a nice little edge at this level.

I won’t be buying puts unless the SPY breaks below $130. I don’t see that happening for another month. First we will get a nice little rally and that will set up a great put buying opportunity at higher levels.
The FOMC minutes will be released today. QE3 is still off the table and “Operation Twist” will continue. The release will be neutral.

Look for choppy trading today. The big move came yesterday and I don’t believe we will see another one today. Weak economic news from China is priced in. Traders will wait for Friday morning. Bank earnings and the actual releases from China will spark trading activity.
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