Thursday, February 21, 2013

The Pullback: Day 2

The market is selling off in early trading after some rare selling pressure surfaced yesterday with the market closing at its lows.  Global markets were also in selling mode overnight, and today our markets are pulling back for a second day.

The S&P 500 has only pulled back 2% so far, but given the way the markets have performed this year it wouldn't be all that surprising to see the markets bounce back following this brief 2% pullback.  Energy stocks are down the most so far today, while defensive consumer staples are bucking the weakness (with a good earnings reaction in WMT).

Economic news was mostly light today.  The big surprise was the Philly Fed survey, which fell all the way to -12.5 from -5.8 in January.  Economists were looking for it to move back into positive territory.    Existing home sales hit 4.92 million units in January, slightly below expectations but above the prior month's level of 4.90 million units.

The dollar is up again and adding to pressure on commodities.  Oil prices are lower to $93.30, and copper prices are lower again also.  Gold has been very weak lately but today is seeing a relief bounce only back to $1580.

Asian markets were down across the board overnight.  China led the declines with a -3.0% selloff, its biggest loss in 15 months.  Investors worried over rumors that Beijing is looking at new measures to cool off property speculation.  S&P said China faces downside risks resulting from its property bubble and it could carry significant GDP implications.

Europe's markets were also down across the board after regional PMI readings in France and Germany came in below expectations.  The PMI reading for the overall Eurozone was 47.8 and the services component was 47.3.  Both were weaker than expected and remain in the range that signifies contraction in the economy. 

Trading comment:  We are starting to lighten up a bit on some of our ETF hedges around the SPX 1500 level.  We think there is a 50/50 chance that a 2% dip is all we might see on this first leg down.  If that is right, the market could bounce in the near-term.  The alternative scenario is that any bounce is weak and short-lived, and that the market continues to correct to the tune of something closer to 3-5%.  Even that scenario is not a disaster and should prove to be a good buying opportunity to add to equity exposure.

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