GDP

All eyes are on the GDP number at 8:30 ET. If there is a big surprise in either direction, it could be market moving. I would consider a big surprise to the upside to be anything north of 3.2% (the consensus estimate) and a big surprise to downside to be anything less than 2.5% (briefing.com estimate and just below the Goldman estimate).

I think the GDP number is more likely to be damaging to the market than helpful because the market considers it a “one time” number anyway. It includes programs such as cash for clunkers, the housing credits and stimulus payments. Put another way, most economists don’t believe that this number is a preview of Q4.

So if GDP comes in south of 2.5%, it means that even with all the stimulus we’re not getting economic growth. This likely causes a revision down of Q4 estimates which is really what the market is trying to ferret out.

Yesterday was a very bearish day for the market technically. The dollar’s ascent continued and you can see a follow through day on UDN. I would now consider that March trend line broken. With the decent of the dollar halted (at least for now), shorting stocks is on the table again.

I said yesterday morning that it was a forgone conclusion that SPY would at least test the 50-day SMA. Well, that is exactly what happened yesterday. As I mentioned yesterday, the bearish action is pretty compelling:

1. The entire rally looks like it could be a rising wedge. The low volume on the entire rise supports this thesis.

2. Price is breaking down from the wedge which was one of the expected scenarios.

3. IYT (transportation) has formed a double top. This is a major component of the market.

4. Part of the fuel for the rise could be attributed to a falling dollar. The dollar declined in a very methodical fashion since March. Does the Fed through its QE program have this kind of ability to methodically reduce the value of the dollar? And if so, it looks like that program has been turned off. In any event, with the dollar now rising (or at least not declining), this fuel has been removed.

What is my strategy? I’m moving this ship slowly. I’m thinking the market is going lower for the foregoing reasons but I also wouldn’t be surprised to see SPY bounce off the 50-day to $108 or $110 (up to the underside of the wedge). If you’re highly confident the market is going lower, you might say “I’m loading up short here because I know it is going lower.” That is fine, but how are you going to feel if the Dow breaks 10,000 again? Will you remain resolute with your shorts? Or will you cover in frustration? I’m not putting myself through that. I’m waiting for the 50-day to be taken out on SPY and China (FXI) to fail among others before I start adding more shorts. If this is really a shorting opportunity, we’ll have some time. It is unlikely to be a one day or even one week event. Even if the market collapses today, there will be retracements (and if there isn’t, I’m willing to take that risk).