New Market High Likely This Week – ISM Manufacturing Will Be the Key Today

Posted 9:30 AM ET (Market Open) - Last Friday the market rebounded and the rally continued yesterday. Janet Yellen softened her tone and the market challenged resistance at SPY $187.50. The price action before the open is bullish and we could see a breakout today. Official PMI's were better-than-expected. Europe's number was in line and their economic rebound is intact. China's PMI came in at 50.3 and it was above the expansion level (50). This was not a strong number, but fiscal spending programs are keeping hope alive. ISM manufacturing will be released 30 min. after the open. This should be a good number, but the expectations are high (54). This number will either push us through resistance or it will attract profit takers. Given the recent rally, I believe it will push it through resistance. ADP will be released tomorrow and it has outpaced the jobs report in recent months. Temperatures are rising and the bad weather excuse is getting old. Traders want to see improvement and they should get it. Initial jobless claims have been improving in recent weeks and that bodes well for the number. Russian troops are pulling back from the Ukrainian border. This is a positive development and tensions could ease. The market looks poised to breakout, but my participation will be limited to day trading. I want to keep my overnight exposure to a minimum. The gains from this point on will be hard-fought and I want to monitor the selling pressure from the sidelines. Buyers and sellers have been paired off so far this year. That is why the market has not been able to move higher. Resistance has been strong and that suggests profit-taking. Asset Managers have been reducing risk by rotating out of equities and into bonds. Yields are declining and that is counter-intuitive given the Fed's tapering program. This rotation suggests a flight to safety (risk off). There is an old adage, "The market climbs a wall of worry." I don't believe that is the current situation. Every negative news story has been discounted. China's economy is slipping, but the focus is on fiscal spending. Their shadow banking system could crumble at any time, but all is fine since we haven't had any defaults in the last few weeks. Japan hiked it sales-tax today from 5% to 8%, but the focus is on fiscal stimulus and monetary easing. Japan's exports have not rebounded even though the yen has been pounded. Europe is fighting disinflation and that will restrict consumption. The ECB could push rates into negative territory and that easing has grabbed the headlines. Brazil's debt was downgraded two notches and it is just above junk. Argentina is also on the ropes. Obamacare will increase insurance premiums by $2-$3000 per year for working Americans and that will weigh on consumption. If stocks were cheap, you could justify the recent market rally. However, the S&P 500 is trading at a forward P/E of 16. Earnings season kicks off next week and profits are expected to be flat year-over-year. Recent IPOs feel "fluffy". Companies are rushing to go public and in many cases their bottom line growth is minimal. Revenue growth is the focus and monetization is not a priority in many cases. The Unemployment Rate is expected to come in at 6.6% and analysts believe 185,000 new jobs will be created. That sounds great, but it's not. The unemployment rate continues to fall because unemployed workers are removed from the labor force (they've given up looking for work). Labor force participation is at multi-year lows and the true unemployment rate is somewhere north of 11%. Our economy needs 250,000 new jobs per month just to keep up with new entrants and we are not even treading water. It is foolish to call a market top during a five-year bull run so I'm not going to do that. I will let the market tell me when it's time to get short. From a seasonal standpoint, I believe we will see a nice push higher and the move will stall quickly. The breakout will fail and we will roll over towards the end of April. The selling could lead to a normal 10 to 15% correction, or it could be the start of a trend reversal. The issues mentioned above will determine if the trend is preserved or if we roll over. ISM manufacturing will be important today. The market will either back off or forge ahead. The news the rest of the week should be market friendly and I believe we will see a new all-time high. Focus on breakouts through horizontal resistance and keep your size small. Use that breakout as your stop. Set targets and take profits. A breakout could last a couple of weeks, but the closer we get to May, the greater the danger. If you don’t like the backdrop, stay on the sidelines. I still feel this is a low probability trading environment. . .

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