Market Will Tread Water As Earnings Season Begins. Next Big Move Is Down – Be Patient

Posted 9:25 AM ET (Pre-Open) - Yesterday, the market shot higher after the Fed minutes were released. Committee members commented that the market misinterpreted its last statement as being too hawkish. Stocks rallied on the news and we are back in the middle of the trading range. From my perspective, the FOMC minutes were simply an excuse to rally. The market was badly beaten down after the jobs report and the decline was over-extended. The Fed's actions have not changed. They will continue to taper. Their timeline is also the same and they will tighten a year from now. The news did not justify the rally. Initial jobless claims fell by 30,000 and that was a great number. In order to avoid up May correction, I believe we need to see 250,000 new jobs created in the month of April. Today’s number was a step in the right direction. Every economic release in the last three months has been given a free pass due to bad weather. In theory, consumers stayed home and they postponed purchases. As temperatures rise, analysts are expecting this pent-up demand to be unleashed. Last week, ISM manufacturing, Chicago PMI, ISM services, ADP and the Unemployment Report all came in light. If traders do not see signs of improvement soon, they will question the pent-up demand theory. This morning we got a small peak from the retail sector. BBBY reported a same-store sales increase of 1.7%. FDO reported a 6% decline in sales and PIR reported a 2.4% increase. These numbers were from earnings reports (quarter ending March 1). This is not very encouraging news and consumers are still cautious. Retailers will post same-store sales numbers for March this morning. That will be a current gauge of consumption and I will watch the numbers closely. China released its trade balance numbers last night. Exports declined by 6% (an increase of 4% was expected). This was a large miss and conditions will continue to deteriorate. China's fiscal spending program will not bear fruit for a few months and traders will soon question if the stimulus is "too little too late". Stocks typically rally into earning season. The strongest companies announce early in the cycle and optimism builds quickly. This will help the market tread water for two or three more weeks. Profits are expected to be flat year-over-year and revenues will only grow by 3% (slightly more than inflation). Stocks are trading at a forward P/E of 16 and these results will do little to excite investors. Bond yields have been declining and that is counter-intuitive given the Fed's tightening timeline and tapering. As they decrease their bond purchases, the difference needs to be soaked up by investors just to keep a lid on bond yields. Money is flowing into bonds and the difference has been more than offset. If economic conditions are truly improving, you'd expect yields to move higher. The only way I can explain this decline in yields is a flight to safety. Asset Managers are rotating out of equities and into bonds. This is a very low probability trading environment. The SPY has whipped violently from $184 to $189 during the last six weeks. Resistance is heavy at the all-time high. I am day trading until we have a breakout one way or the other. My suspicion is that this will be resolved with a correction that starts in a few weeks. Horizontal support at SPY is just above the 100-Day MA ($183). The market will tread water as earnings season unfolds and it might even challenge the all-time high. The closer we get to May, the greater the likelihood for a selloff. Five-year bull markets die hard and it is foolish to prematurely short this market. We need to see a breakdown below the 100-day moving average and any attempt at a bounce needs to quickly fail as well. Once I see that price action, I will take bearish positions with confidence. If your investments have a lot of market exposure, I suggest reducing risk. Sell stocks or buy puts as a hedge during the next few weeks. We might have 2 to 3% of upside and 15% downside. If conditions continue to deteriorate in China, we could decline even more. Keep your size small while we wait. . .

Daily Bulletin Continues...