The market made a new all-time high after the Unemployment Report last week. Bullish sentiment was extremely high and some of the “fluff” has been worked off this week. Stocks pulled back and support was established.
The overnight economic news was bearish. China’s retail sales grew at a slower than expected pace and industrial production missed expectations. Surprisingly, Asian stocks rallied. China has been weighing on the market and many traders are concerned that an economic slowdown is on the horizon. Credit concerns are also an issue because of their large shadow banking system. For now, the PBOC is not concerned.
Crimea will hold a vote this weekend. Most analysts believe that they will be annexed to Russia. US/European rhetoric is escalating and this event has been completely discounted by the market. Any surprise favors the downside.
The Fed will meet next week and they will continue their tapering program. Credit markets will tighten and an interest rate hike could be possible within the next year if hiring increases.
Here is some good news.
Domestic economic releases have been good. Initial jobless claims fell by 9,000 this week and retail sales came in better than expected (.3%).
The harsh winter has impacted economic activity. Temperatures are starting to rise and that could unleash pent-up demand.
Corporate profits grew 7.5% and that is a healthy pace. Companies are lean and mean and any uptick in demand will go straight to the bottom line. Cash flows are at record levels and that is fueling buybacks/M&A.
The macro backdrop is bullish. However, there are plenty of headlands. We need to tread cautiously during the next week.
I’m currently on the sidelines and I want to see how the next few days play out. If the market stays above SPY $185 I will buy a few calls next week. My position will be small. If that level is breached, I will buy puts.
The price pattern this year will be two steps forward, one step backwards. It will be important to buy dips and to set targets.
There will be a handful of excellent trading opportunities where we can spread our wings. The capitulation low a few weeks ago was one example.
I suggest keeping your size relatively small and waiting for these events. The rest of the year we will be trying to grind out profits with smaller trades.
Think of yourself as a prize fighter. There will be lots of jabs and defense. Eventually you will get the right set-up and then you can try to land a knockout punch. I am in your corner and I will tell you when the time is right to take that swing.
We are at an all-time high and everything feels great. I urge you to temper your excitement and to keep your size small.
Let the news play out and use SPY $185 as your guide.