Option Traders - Focus On the Range - Not the Wedge.
Posted by Pete Stolcers on February 29
Like Chinese water torture, bad news keeps dripping on this stock market. It’s amazing that as of this writing Friday morning, the market is still showing a gain for the week. Day after day, new information has been weighing on the bulls.
A week ago, news of an Ambac bailout saved the market and sparked a 30 point intraday reversal in the S&P 500 futures. Monday and Tuesday, the market rallied as bond insurers were able to generate enough capital to maintain their triple AAA credit rating. Today, we learned that Wilbur Ross invested $1 billion in bond insurer Assured Guaranty.
In order for the market to establish a bona fide support level, it needs to convince traders that the odds of a financial collapse are miniscule. The bond insurers are one small piece of the puzzle. Abu Dhabi’s investment in and Bank of America, China’s investment and Morgan Stanley and the UK’s nationalization of Northern Rock are all steps in the right direction.
Yesterday, AIG posted a loss of $5.3 billion. That compares to a $3.4 billion gain a year ago in the same quarter. As I have been mentioning, the aggregate losses posted by financial institutions this quarter ($27B) have equaled their gains from last year. That helps to put the write-downs into perspective. That’s the extent of the good news.
Here’s the bad news. The PPI rocketed by 1%, the GDP rose .6% when .75% was expected, durable goods were -5.3% when -4% was expected, the dollar has fallen four consecutive months versus the euro and it stands in a 30 year low, oil is over $100 per barrel and the Ambac deal has hit a snag.
Next week we will get the ISM numbers. You might recall that they sent the market lower on a dramatic miss last month. The ADP employment index, the Beige Book and the Unemployment Report will all be released next week. Initial jobless claims have been on the rise and that will weigh on next week’s numbers.
This week, the Fed Chairman described weakening economic conditions and he is prepared to lower rates. Ben Bernanke dispelled the possibility of stagflation. Currently, the market has priced in a 62% probability of a .75% rate cut in the month of March. These Fed rate cuts are temporarily supporting the market and at this pace, the Fed will be out of bullets quickly.
The earnings front is light and I’m not expecting any positive releases. HSBC and a variety of retailers will announce their performance.
From a technical standpoint, the market did stage an upside breakout from a wedge formation. However, I don’t give that much credence given the decline the last two days. Traders seem anxious going into the weekend and we are likely to see selling into the close.
