NEW YORK (Reuters) – Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend next week.

With few catalysts on tap, it could be difficult for investors to find a reason to buy even as recent declines and a jobs report that didn’t confirm investors’ worst fears present the opportunity for a short-term boost.

Markets will be closed on Monday for Independence Day, and the holiday is expected to depress volume during the week, making equities more vulnerable to large swings following the worst week for the S&P 500 in two months.

“Only about 30 percent of stocks are above their 200-day moving averages, so the vast majority are on a downtrend,” said Frank Gretz, a market analyst at Shields & Co in New York.

“The market needs to prove itself with a rally on strong volume, and that’s going to be hard to get with the holiday and the bad news we’ve seen creating more pessimism.”

For the week, the Dow fell 4.5 percent, the S&P lost 5 percent and the Nasdaq shed 5.9 percent.

Over the past couple of months, markets have been beset with a string of negative data showing weaker-than-expected retail sales, consumer confidence and plunging home sales. The data was capped by Friday’s weak payrolls report.

BETTING ON DECLINES

Options activity on exchange-traded funds (ETF) that tracks the S&P 500 benchmark and the Nasdaq suggest that investors are betting on further declines.

“The most actively traded options on the SPDR S&P 500 ETF are the July $100 puts, suggesting traders are hedging for potential losses,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati, Ohio. The ETF (SPY.P) fell 0.6 percent to $102.20.

Similar activity was spotted on the PowerShares QQQ Trust ETF (QQQQ.P) which tracks the performance of the Nasdaq 100. The most active trades were on July $41, $40 puts. The ETF closed 0.3 percent lower at $42.47.

“We are in a tremendously oversold situation, but that doesn’t mean we can’t sell further. Options activity shows that the bears are in control and that the trend will continue,” Detrick said.

As of late Friday, 133.94 million shares traded on the SPDR S&P 500 fund, and on Thursday 382.92 million shares exchanged hands, the highest volume since May 21. The 3-month average trading volume is 266.34 million shares.

“When the volume is high on a down day like yesterday and today, it confirms that this is a bear market and that the sellers will be in control.”

The QQQ Trust ETF traded 46.19 million shares as of late Friday, but the volume reached 158.69 million on Thursday, compared to a 3-month moving average of 103.50 million.

The June U.S. non-farm payrolls report showed a fall in overall employment while private payrolls rose only slightly, a sign the recovery continues to struggle to gain traction. For details, see [ID:nN01165161]

But some analysts say the market’s recent sharp declines and positive elements in Friday’s unemployment report could give stocks a short-term boost.

STOCK BOUNCE POSSIBLE

“Investors were worried that the report would show the economy melting down, and clearly that didn’t happen,” said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey.

“The psychology was just too negative about the labor market and the economy in general, so we could be due for a bounce.”

The S&P’s 14-day relative strength index fell below 30 on Friday, indicating it could be oversold in the near-term. The Standard & Poor’s 500 Index .SPX fell to 1,022.58 on Friday. The benchmark could find technical support near the 1,008-1,010 level, this year’s low and also the 38.2 percent Fibonacci retracement of the advance from the low in early March 2009 to the high in April 2010.

One of the few indicators on tap for next week is June same-store sales, which many retailers will report on Thursday, giving insight into the state of consumer spending.

“Consumers are very cautious right now, and we’re not looking for much incremental growth at all,” said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware.

Nyheim added that discount retailers could be among the few sectors to see improved sales as consumers “trade down” to lower-priced merchandise.

Discount retailer Family Dollar Stores Inc (FDO.N) is scheduled to report quarterly results on Wednesday, the sole S&P 500 company to report next week. The third-quarter earnings reporting season begins in earnest with Alcoa Inc (AA.N) on July 12.

“Family Dollar has seen some positive trends of late, and they’ve been picking up market share from other retailers,” said John Massey, portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey.

Despite the lack of scheduled reports, a number of companies could give guidance about earnings next week. John Butters, the director of U.S. earnings for Thomson Reuters, said that the week before the start of earnings season “will be the time companies will come out and say, ‘This is what we’re going to do.’”

As the earnings season nears, Butters noted that there were 1.2 negative company preannouncements for every one positive. Historically, the ratio has been two negatives for each positive.

Also on tap for next week is the Institute of Supply Management’s services sector survey for June, which is expected to contract slightly from the previous month but still show expansion.

(Reporting by Ryan Vlastelica and Angela Moon; Additional reporting by Caroline Valetkevitch and Matthew Lynley; Editing by Kenneth Barry)

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Overnight, the EUR/USD cross rate was little changed. Asian stocks are mostly higher, supported by strong Q1 growth in China. However, at least for now there is no indication that the recent stalemate in EUR/USD trading might be unlocked anytime soon.

Today, the US eco calendar is again very well filled, with the jobless claims, the Empire manufacturing survey and the Philly Fed survey, the US industrial production data and the TIC data. The data are of course interesting. However, as was the case yesterday, it is highly doubtful that they will be able to provide a clear guide for EUR/USD trading. On top of that, one still can not but mention the pending uncertainty on the next steps in the Greek soap. Quite a lot of this uncertainty is discounted at the current EUR/USD levels. Nevertheless, it is still difficult to see this story yielding any positive news for the single currency. So, even as the global context remains constructive for riskier assets, the upside in this pair looks limited. One can raise the question what will happen when the global context at one point would turn less positive on risky assets.

Looking at the technical charts, the EUR/USD currency pair is still trying to build a ST double bottom formation with neckline at 1.3592. For now, the ‘break’ above this level was not able to reinforce the ST positive momentum in this pair. This is a disappointing for EUR/USD bulls. The targets of this ST double bottom formation come in at 1.3902/17. In a broader perspective, the EUR/USD currency pair is now enfolding some kind of a consolidation pattern between 1.3268 (reaction low) and 1.3819/50 (previous reaction high/MT breakdown). Within this pattern, we still prefer a sell-on upticks approach in case of return action higher in the range. We still assume that a sustained rebound beyond the 1.3850/1.3900 area will be (very) difficult. Long term, we stick to our cyclical USD positive call, too.

As was the case for several other major cross rates, there was also no clear story to drive the price action in the USD/JPY cross rate. During the morning session in Europe and early in the US, the pair was underpinned by good European and US eco data and by a strong stock market performance. The pair reached intraday highs in the 93.70 area. However, also in this cross rate a first minor resistance (93.78 reaction high) was a too high hurdle to overcome. On top of that, the soft comments from Fed Chairman Bernanke were no big help for the dollar either. So, despite the strong equity performance, the USD/JPY rebound stalled and the pair even had to return the earlier gains. USD/JPY closed the session at 93.23 unchanged from the 93.20 close on Tuesday (and the 93.24 close on Monday). So, despite quite some interesting developments on global (equity) markets and mounting evidence that the world economic recovery is gaining strength, this is not a good reason enough to stir some price moves in the USD/JPY cross rate for now.

Overnight, the situation hardly changed. In Japan, there were only some second tier eco data on the agenda. Japanese equities (and most other Asian stock markets except for China) show moderate gains, but this still fails to inspire any price action in USD/JPY. Investors anticipating on monetary tightening and currency strength in other Asian countries (cf Singapore or China) might limit the downside in the yen too, even as the monetary context in Japan is completely different.

Recently, the performance of the USD against the yen was not really convincing. So, we kept a wait-and-see bias. We have a LT USD/JPY positive bias, but we advocated waiting for a sign that the recent correction has run its course. On Tuesday, the pair showed some tentative signs of a bottoming out pattern. Since then the pair is a few ticks higher. So, the jury is still out whether this was the turning point. Nevertheless, the ongoing deflation talks remain an important yen negative factor. The stock market reaction to the earnings will be an important factor for USD/JPY trading going forward. If the pair would regain the 93.80 area in a sustainable way, this would be a first positive signal. The picture is still fragile, but we hold on to our view that a cautious buy-on-dips approach might still be considered.

On Wednesday, the EUR/GBP currency pair turned south again. Especially during the European morning session, the euro was again fighting an uphill battle with headlines on Greece (and to a less extent on Portugal) the most obvious drivers for euro caution. Technical consideration played a role too. The inability to regain the 0.8860 resistance area (Tuesday high) was a disappointing signal for EUR/GBP bulls, too. Later in the session, the correction stalled. In the current environment, it is also difficult to see whether global investor appetite for risk should support the euro rather than sterling. EUR/GBP closed the session at 0.8827, compared to 0.8851.

Overnight, Nationwide consumer confidence came out well below market expectations. However, at least for now this has no negative impact on sterling. On the contrary, the slide in EUR/GBP continues. A poll that the Conservatives might secure a victory in the early May elections is supporting the UK currency.

Today, the UK calendar is again empty.

Recently/last week we were a bit surprised by the recent sterling strength, even as it was at least partially euro weakness rather than sterling strength. However, after the correction earlier this week, it looked as if the sterling rebound had run its course. To be honest, the subsequent EUR/GBP rebound is not really convincing either. Nevertheless, we still assume that more sustained sterling gains beyond the recent EUR/GBP lows are not that easy. Several strong support levels are lining up in the EUR/GBP cross rate: 0.8705 (reaction low), 0.8660 area and 0.8602 reaction low. We expect this area to be difficult to break. So, we are not in a hurry, but a cautious buy-on-dips approach in case of return action toward the 0.8700 area is still favoured. A sustained break below the 0.8603 MT low would signal a change in sterling sentiment for the better. However, for that to happen the risk of a hung Parliament needs to be out of the way.

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Published on Thu, Apr 15 2010, 07:43 GMT

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