ForecastStocks:
The European debt contagion remains front and center. Spain and Italy bond yields remain high, but are off their worst levels after the EU Summit produced a vague pan-European banking supervisor and other ways to lower periperhal European bond yields. This is positive in the short-term, but will only provide a respite to lower stock prices. Also, China remains on a growth deceleration curve, with growing concerns of a very hard landing — various estimates are centering in on the 7.0% level and even lower.
Strategy: The S&P 500 remains above long-term support at the 160- wma at 1203; which delineates bull/bear markets. However, the 200-dma support zone at 1266-to-1278 remains the bulls “Maginot Line,” while overhead resistance at 1340-to-1360 has also proven itself as resistance. However, we expect this zone to be ultimately given in the days ahead, with a short-term target of 1390.
World stock markets were on hiatus Friday, and they traded down across the board. If there were any concerns, then it would be those very same concerns that remain about Europe, and in particular Spain and Italy. In each of those country’s bond markets, 10-year bond yields rose – Spain’s 10-year is higher by +20 bps to 7.22%; while Italy’s 10-year yields were higher by +14 bps to 6.14%. Once again, both are above their respective “worry points,” and indeed the markets are worried that the Europeans are once again dragging their collective boots. This sentiment masked what is considered to be “good earnings” reports out of a number of US companies Friday morning – Baker Hughes (BHI) being one of them – and a holding of ours.
We are of the opinion that the day's weakness was simply a correction of the recent rally from S&P 1325 to 1380 last week. It is reasonable to take a break – and to back some profits; it is reasonable to remain constantly worried about Spain and Italy given the back up in yields – and it is reasonable to applaud good earnings reports. The question is whether Friday's markets reflected the beginning of a larger decline or simply a correction to relieve an oversold condition. For now, we stand with the latter, and we shall do so until last Thursday’s lows at 1325 are violated.
Trading Strategy: We are long of energy and healthcare a smidgeon of agriculture. We like these positions a great deal from a technical perspective, and indeed they performed relatively well as the market corrected intraday. However, we grew weary of supporting ANR as the market moved higher – ANR at best has simply treaded water. We’ve given it ample time to trade higher; and now we’ll jettison it and bid it goodbye. We fear that ANR given its debt load may be following Patriot Coal (PCX) into the scrap-bin of restructurings – a circumstance no one wants to be a part of. Hence, we’ll exit ANR on the opening and we’ll replace it with Hess Corp (HES)…which has none of the ANR fleas if you will.
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