The market successfully navigated land mines the last two weeks. Spanish banks received $125 billion in aid and Greek elections were won by pro-bailout candidates. Stocks rallied on the news, but the momentum will stall as we hit resistance.
This afternoon the FOMC will release its statement. The rhetoric will be dovish, but QE3 will not be considered at this time. “Operation Twist” will continue and the market will be mildly disappointed.
Overnight, flash PMIs will be released. China’s activity will falter and the news will weigh on the market. Industrial production, trade balance, retail sales and the PMI all missed expectations last month. US exports to China declined 14% in May. Power consumption has declined and new loans have slowed. China’s most pessimistic advisor believes that Q2 GDP will decline to 7%. After the flash PMI, traders will wonder if China is doing enough to stimulate growth.
Initial jobless claims inched higher last week. The 4-week MA is above 380,000 and the market will get nervous when it sees another increase. Corporations are not hiring due to uncertainty. European credit concerns, a recession in Europe and the Supreme Court’s decision on nationalized healthcare are taking a toll. Two weeks ago, Challenger, Gray & Christmas reported that companies are planning more layoffs this summer.
Spain will auction three and five year bonds tomorrow. If the ECB does not support the auction, interest rates will spike. I believe the results will be mediocre. Yields in Spain are dangerously high and fear is on the rise.
The problems in Europe have not been solved; we simply avoided a disaster last week. Deficits are growing and future bailouts will be needed. Eurocrats are long on ideas and short on action. They will meet next week to discuss the possibility of centralized banking throughout Europe. Sovereigns will not want to give up this control. In coming weeks, politicians will disappear on vacation and the market will get nervous.
The SPY is bumping up against major resistance at $136 (horizontal and the 100-day moving average). Asset Managers are buying passively and the volume has been light. No one feels as if they will miss the next big rally. There are still too many unresolved issues.
I am not looking for a massive decline. I believe stocks will retrace in the next two weeks and a few earnings warnings could spook investors. The market will find its footing and it will rally into earnings season. That move will exhaust itself and we will be set up for a substantial decline towards the end of July.
No one wants to be short into the FOMC decision and I believe that has contributed to the rally this week. Once traders see that QE3 is off the table, the market will be vulnerable. I am selling my call positions today and I will be flat into the FOMC statement.
I will be buying puts if the SPY trades below $134.50 today. As I mentioned earlier, I am not looking for a massive decline, just a pullback. I will keep my size relatively small.
Passive accounts should take profits on bullish positions today. Wait for the market to “come in” and sell out of the money put credit spreads later next week once support is established. If earnings warnings are minimal, the market will rebound into earnings season. The Fourth of July holiday will also attract buyers.
I will buy a few puts today if support is broken this afternoon and I will take profits quickly. If the reaction to the FOMC statement is bullish, I will stay on the sidelines and I will let the market run.