Market Losing Fire Power – High Fliers Are Not Bouncing. Last Stages of the Rally – Use Caution

Posted 9:45 AM ET - The market is within striking distance of the all-time high and the news has been good enough for us to breakout. More than 65% of companies have exceeded earnings estimates and the economic news has been better than feared. That said, I don't trust this rally and I will watch from the sidelines. This week China's flash PMI was slightly better-than-expected (58.3). Activity continues to slip and the focus is on fiscal stimulus. It will take months for that to bear any fruit. The PBOC reduce reserve requirements for rural banks, but I am hearing that it was to avoid a cash crunch. Chinese banks will post earnings and I will be watching loan defaults. I suspect they are on the rise. The flash PMI's in Europe were very encouraging. The EU posted a very solid number (54) and the ECB might not have to ease. Economic conditions in the US are sluggish. New home sales declined by 14%. This is certainly not the pent-up demand analysts have been looking for. Initial jobless claims jumped to 329,000 last week. Easter might have played a role, but job growth is still meager. Major economic releases are slated next week (ISM manufacturing, ISM services, ADP and the Unemployment Report). If we do not see 250,000 new jobs in April, I believe the market will correct in May. Corporate profits are flat year-over-year and the S&P 500 is trading at a rich forward P/E of 16 (current P/E of 22). The strongest companies announce early in the earnings cycle and we have heard from social media, Internet, mobile, biotech, cloud and semis. The high flyers are almost done posting results (AMZN after the close) and earnings season will not pack much punch from this point on. Apple posted excellent results yesterday and it is fueling the rally this morning. Facebook also posted a good number and it is trading higher. After the beating we've seen in the tech sector, I expected a bigger bounce. Each time the market has challenged the all-time high, profit-taking has set in and we've seen huge reversals. That is a sign of stiff resistance. The Fed has been steadfast in its tapering program and rates are expected to move higher next year. Given this backdrop, you would expect interest rates to move higher. Strangely, yields have been declining and that suggests a flight to safety. I am in cash and I do not trust this rally. We might see some buying today, but we are in the final stages of this rally. I feel there might be 2% of upside potential and 15% of downside potential. The risk/reward profile does not justify a long position. If you are long, raise your stops to $187 and set targets. I will be watching for signs of selling. I would like to see a rally that fails and reverses intraday. I would also like to see late day selling. These would be warning signs. Five-year bull markets die hard and I do not want to be early. I will buy puts below SPY $187, $186.00, $184.50 and $183. I will be scaling in on weakness. I still believe the next big move is down. . .

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