Morning Call: Spain Downgrade Could Provide Buying Opportunity

US stock futures point to a higher open Thursday morning despite last night’s S&P downgrade of Spanish debt two notches to one level above junk. Initially when the report hit after the close of US markets, futures headed lower, but it seems now Wall Street is shrugging at the news. The downgrade could push Spain closer to asking for a bailout, which may actually bring some clarity to the European debt crisis. Spain has seen its bond yields driven down without it having to make any budgetary concessions, but a bailout plea would have to come with austerity.

In reality, the technical damage has been adding up for a few weeks. The damage was great enough that IBD’s Big Picture went to “Rally under Pressure,” and then after yesterday’s down move to “Market Correction”.  Does that mean sell everything?  No! But hopefully everyone has already at least trimmed some winners and active traders have perhaps made some money short as opportunities presented themselves.  Yesterday morning we talked about how testing some longs with a short leash wasn’t a bad play as we remain with this macro uptrend, but the market couldn’t sustain a bounce. At the end of the day yesterday, we entered even more extreme oversold territory, an area where the risk-reward would seem to be skewed in favor of dip buyers.

Many will be asking today: why is the market opening higher after a significant downgrade of Spain? As we teach in our Active Trading Course, often times you see big news events mark short term tops and bottoms in the market (and not in the direction you may think). Positive news can mark tops as buyers make their final push, and negative news can lead to a bottom as the final sellers exit. For example, the day Bin Laden was killed (May 2, 2011) there was euphoria in the US and the world, and market opened higher. However, stocks reversed to the downside and put in a high that was not eclipsed until late February 2012! In this case, news of the Spain downgrade may have gotten all of the sellers out last night, and we could rally today.

Yesterday, a poor start to earnings season was the catalyst for the follow-through to the downside. Two Dow components–Alcoa (NYSE:AA) and Chevron (NYSE:CVX)–traded sharply lower after lowering forecasts in the face of a slowing economy. Traders will be watching closely to see if we can reverse that trend this earnings season, which is expected to be one of the worst in years. The banks will be in focus over the next few trading days, with JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) set to report Friday morning, and then a slew of names, including Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC), set to announce next week. The banks have played a crucial role in the market’s bounce over the past few months, and they will be a key cog if the market is to resume its upward momentum.

Shares of Spring Nextel (NYSE:S) are up about 13% this morning after the Wall Street Journal report Japanese mobile carrier Softbank Corp was in advanced talks to buy Sprint. The acquisition would top $12.8 billion and represent a massive gamble for Softbank, which in 2006 also acquired Vodafone’s Japanese unit.

If the bears want to remain in control of the S&P, they probably shouldn’t let the bulls reclaim 1440-1442. The major line in the sand stands around 1450. On the support side, if this gap up fades, the levels to watch are 1430 then 1422-1424.

Weekly jobless claims came through at 8:30 ET and are adding to pre-market gains this morning. Claims were expected to rise by 1,000, but instead fell by 30,000 down to 339,000. Continuing claims also fell 15,000 to 3.27 million. Also at 8:30, US import prices rose and the trade gap widened by 4.1% to $44.2 billion, but investors seem more interested in the strong jobless claims number.

Scott Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach. He began his career as a broker and venture capitalist where he was able to facilitate relationships that led him into trading. Beginning his trading career at Broadway Trading in 1999, Scott moved on with Marc Sperling to Sperling Enterprises, LLC after establishing himself as one of the best young traders in the firm. As a manager at Sperling Enterprises, he maintained his status as a top trader in the industry while working closely with all traders in the firm to dramatically increase performance. Scott has participated in more than 30 triathlons and one IronMan triathlon, exhibiting a work ethic that also defines his trading. His vast knowledge and meticulous attention to detail has led to regular appearances on CNBC, Fox Business and Bloomberg, and he has been quoted in the Wall Street Journal and Invest.

Scott is currently the Chief Strategic Officer of T3 Live and is a Registered Associated Person of T3 Trading Group, LLC.

*DISCLOSURES: Scott Redler is long SPY

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