New High – The Market Should Grind Higher Into Earnings Season. Focus On Breakouts

Posted 10:15 AM ET - Yesterday, the market broke out to a new all-time high. Traders are buying ahead of economic releases and earning season. Bad news is getting a positive spin and stocks want to grind higher. This morning, ADP reported that 191,000 new jobs were created in the private sector during the month of February. This was below estimates (215,000). Last month’s number was raised by 40,000 and that was positive. The market did not have much of a reaction to the release. ISM manufacturing and Chicago PMI came in light this week. Bad weather is taking the blame for any "miss" and for now, these releases are getting the benefit of the doubt. Initial jobless claims and ISM services will be released tomorrow. The consensus estimate for Friday's jobs report is 200,000. We could see a rally into the number. Traders view Friday as a "can't lose proposition". If the number is light, they will blame it on bad weather. If the number is strong, they will assume that the recovery is underway. Bullish sentiment was very high going into the number last month and we saw a steep decline after the release. Rumors are circulating that China might reduce real estate restrictions. They will launch a fiscal spending program and that is getting all of the attention. China's official PMI was 50.3 and that calmed nerves yesterday. The EU’s economic rebound is intact. The ECB will release a statement tomorrow and it should be a non-event. They are concerned about disinflation and Draghi provided his standard lip service. Last week he said that they might consider negative interest rates to stimulate consumption. Earnings season is a week away and analysts are expecting flat profits year-over-year. Stocks are fairly valued at a forward P/E of 16. Revenue growth should come in at 3.5%. These results will do little to excite investors. Interest rates will start creeping higher and the Fed will maintain its zero rate interest policy (ZRIP) for another year. A wide spread between the borrowing and lending rate is good for bank profits. The earnings cycle is dominated by the financial sector during the first two weeks and the reaction should be good. Tensions in the Ukraine are easing. Russia is pulling some of its troops off of the border. This is good news for the market. Now that we have a breakout, the market should be able to grind higher for a few weeks. Buy calls on stocks that are moving through horizontal resistance. Use that breakout as your stop. Set targets and move your stops higher. Keep your size relatively small. I believe we are in the final stages of this rally and I can't fully embrace the breakout. We could get to SPY $192, but I would be shocked if we make it as high as SPY $200. That would represent a blow-off rally and there would be an excellent shorting opportunity. Asset Managers who want to reduce risk have pulled their offers. They will let the market run so that they can sell at a higher price. If the market gets ahead of itself, we will see selling pressure. For many weeks I've been outlining a host of issues that could come to roost very quickly. Optimism is running high and we are not climbing a "wall of worry". Bad news has been given a positive spin. We should see 2 to 3 weeks of bullish price action. As May approaches, the selling pressure will build. Watch for a grind higher today and tomorrow. Prices might get a little overextended heading into the jobs report. We could see a pullback to the breakout at SPY $188 on Friday. That test will hold in the market will rally into earning season. . .

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