Thursday, June 7, 2012

Market is Begging Bernanke for Help ... Again

Well, after tripping on its own feet and tumbling down last week, the market is now looking for a couple of crutches again from Bernanke.  With many rumors and articles basically dangling the Bernanke carrot (or the crutches), the market certainly gave it all to get back on its feet, especially yesterday.  Of course, given that China cut its rates this morning, it appears the expected help is at least partially made in China, similar to most other things consumed in the US.

The VIX strangle strategy from last week did well, at least on the call side.  How well, depends on the expiration date and strike price chosen, and if the position was closed.  And depending on the expiration date, the upcoming Greek elections could help out. Of course, also based on the expiration date, strike price, and given yesterday's big move and futures in positive territory this morning, the put side could go to breakeven or even make some money too.  Regarding the SPY strangle strategy, the puts did well until Tuesday and now the calls are in the driver’s seat, basically for the same reasons mentioned before.

However, let's put the trading talk aside for a bit.  The economy is still barely growing, or as the Fed puts it, the economy is growing at a "moderate" rate.  We all know that most organizations tied to the government (and yes, no matter how its functions/responsibilities are defined, the Fed is tied to the government) use politically correct terms such as moderate.  We continue to believe the economy is growing at a modest pace at best.

Initial jobless claims for last week printed 1K below expectations, which many may view as good news, but that upward revision continued as the previous week's figure was changed to 389K from 383K.  Initial claims came in at 377K versus the 378K Street estimate.  By the way, continuing claims were disappointing as they were higher than expected.  In addition, the prior continuing claims figure was also revised up.

May services ISM was released on Tuesday, and the index of 53.7 was better than expected.  However, there was a significant drop-off in ISM's employment index to 50.8 (which indicates it is barely growing) from April's 54.2.  In addition, even though new orders and inventories did increase, the inventory sentiment index indicated that many think their inventory level remains too high, as mentioned in the ISM report.

Let's get back to the equity market.  The futures were indicating there's basically certainty that Bernanke will provide very pro-QE3 testimony today.  Of course, the slightly better than expected jobless claims was actually bad news because it could prevent Bernanke from being hawkish when it comes to further monetary easing.  This was clearly shown as the S&P futures went from being up 11.5 to 8.0.  They did move higher as we got closer to the opening bell.  S&P 500 is up 13+ at 1328 right now.

If Bernanke doesn't basically say 'we will print more and more money to force many to take too much risk again', then we will likely see the market turn to the downside as the Greek election (which is on Father's Day) and all other issues faced by Europe are still looming.  And do not forget that the US economy is not performing as well as many expected even with all of the monetary easing we have seen.

On the technical side, S&P 500's big move up yesterday did help the bulls a bit.  It closed nicely above the 200-day moving average and based on Fibonacci retracements, it made 1291 the new support level.  We think the next resistance level is around 1325, which S&P 500 has already passed in the first 10 minutes of trading.  If it does close above that level, 1341 could be next, likely making S&P 500 trade in the pretty wide range of 1291 - 1341.  However, if Bernanke disappoints and it closes lower or around 1300, then the 1291 support level will be at risk, with 1250 being next.  There are a lot of if's and if's with what we just mentioned, but then again, there is a lot of domestic and international uncertainty out there right now. 

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