Chances for a Pullback on Wall Street

Dear SlingShot Trader Subscriber,

After yesterday’s pullback in the Dow Jones Industrial Average and the S&P 500, traders are a little on edge wondering if we just saw the start of what could turn out to be a major pullback.

While a pullback is certainly not guaranteed at this point, the chances of seeing a pullback in the near term are increasing.

Here are three things that point to a pullback:

– Lack of support for a Greek bond swap

– Less-impressive economic announcements in the United States.

– Slowing rate of positive earnings surprises in the S&P 500.

Lack of Support for a Greek Bond Swap

Tomorrow, 3 p.m. ET is the deadline for all Greek bondholders to signal whether they are willing to participate in a Greek bond swap or not. At this point, it doesn’t look like the proposal is garnering enough support to be carried out, without enacting the new collective action clauses (CAC) the Greek government retroactively inserted into many bonds and thereby triggering credit default swaps (CDS) on Greek bonds.

If that happens, watch for a pullback on Wall Street because nobody knows just how interconnected financial institutions are in their exposure to Greek CDS.

Less-Impressive Economic Announcements

For the last six months, or so, we have seen positive surprise after positive surprise on theU.S.economic calendar. Whether you’ve been looking at housing numbers, consumer confidence or manufacturing, the numbers have been surprisingly good. Sure, they haven’t been rock-star good, but they’ve been better-than-expected.

Unfortunately, that trend is changing somewhat. While we are still seeing positive economic surprises, the magnitude of those surprises is dropping off. You can see it represented here on a chart of the Citigroup U.S. Economic Surprise Index.

chart1
Citigroup U.S. Economic Surprise Index (courtesy of Bloomberg.com)

Notice how the index skyrocketed in the latter part of 2011, but has been forming lower highs and lower lows since January 2012.

That decline in the magnitude of positive economic surprises is taking some of the wind out of the bullish sails on Wall Street.

Slowing Rate of Positive Earnings Surprises

Two weeks ago, we talked about the slowing trend we were seeing in earnings surprises. This trend is continuing. According to Standard & Poors, of the 485 components of the S&P 500 that have reported earnings for last quarter, only 285 companies (58.76%) beat their Wall Street expectations – while 142 companies (29.28%) missed their estimates and 58 companies (11.96%) reported earnings that were in line with estimates.

While you may look at these numbers and think that 58.76% of the S&P 500 components beating estimates is a good thing, you have to keep in mind that it’s not the number itself that matters the most – it’s the direction that number is moving. In previous quarters, we saw far more than 60% of S&P 500 components beating their estimates.

So while 58.76% is nothing to scoff at, the rate of positive surprises is slowing, and Wall Street is growing more and more uneasy about the prospects for future growth – especially with today’s report of slowing productivity rates and rising employment costs. A combination of those two factors tends to squeeze corporate margins, which makes it much harder to beat analyst estimates.

The Bottom Line for Next Week

Keep your eye on the results of the Greek bond-swap tomorrow for a potential short-term catalyst that could move the market, but don’t forget to pay attention to upcoming economic and earnings announcements. A change in trend on either front could tell us a lot about the depth and length of a potential pullback.

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll be discussing some of these in tonight’s webinar.

Mar. 8 – Deadline for Greek bond-swap
Mar. 8 – Weekly Jobless Claims
Mar. 9 – ANN Inc. (ANN) Earnings announcement
Mar. 9 – U.S. Employment Situation
Mar. 9 – International Trade
Mar. 13 – Retail Sales
Mar. 13 – FOMC Announcement

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here. You can also see more trade-specific details by clicking on the trade links below.

Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.

ANN Inc. (ANN)On March 6, we recommended you to “buy to open” the April 25 Puts for $1.55 or less.

Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

American Eagle Outfitters (AEO)On March 7, we recommended you “sell to close” the April 15 Calls. We closed the position for $1.05 for a gain of 56.72%.

Bridgepoint Education (BPI)On March 6, we recommended you “sell to close” the March 22.5 Puts. We closed the position for $0.74 for a loss of 26.00%.

Office Depot (ODP)On March 7, we recommended you “sell to close” the March 3 Puts. We closed the position for $0.05 for a loss of 87.50%.

Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

ANN Inc. (ANN) See Positions Opened above.

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader