Posted at 9:40 AM ET – Yesterday’s reversal was impressive. China’s trade balance for 2014 was lowered; initial claims rose by 8,000 and retail sales declined .4%. This was a bad round of news and the S&P 500 was down 13 points before the open.
Losses were quickly erased and the market rallied 20 points off of the low. This reversal was a bullish sign.
Asset Managers have renewed confidence and this move still has gas in the tank. Earnings season has been good, the Fed will pause tapering if needed, the debt ceiling was extended and Obamacare will be postponed for small businesses. All of these developments reduce uncertainty.
Even though the macro backdrop looks good, I still feel it is prudent to set targets and to lock in gains. We will bump up against the all-time high and the headwinds will blow. I prefer to watch these “tests” from the sidelines. If the market gets slapped down, it will present an opportunity. If the market breaks out, you can take long positions with confidence.
The soft patch in China is carrying more weight than the recovery in Europe. Shadow banking concerns are elevated and the first investment trust failed a few weeks ago. Non-performing loans increased to 1% from .3% a month ago. The level is not problematic, but the trend could be. China reduced its trade projections for 2014.
Europe posted GDP and it was better than expected across the board. Activity in the EU has weighed on global markets for the last three years and this could be an excellent catalyst.
Economic conditions in the US are sluggish. Economists don’t know how much of this soft patch is related to bad weather. For now, traders seem willing to give growth the benefit of the doubt.
Flash PMI’s will be released next week and they will be scrutinized. China’s numbers are likely to come in light.
The Fed minutes on Wednesday will be benign. Yellen already testified that tapering would be postponed if economic conditions deteriorate.
With earnings, the debt ceiling and tapering off the table, the focus will shift to economic releases.
Take profits as the market challenges the all-time high. If we blow through resistance, you can always get back in. If the rally stalls or the market pulls back, you can evaluate objectively from the sidelines.
This is going to be a tougher year to make money. Taking profits does not mean I am bearish; it is the prudent thing to do after a 6% gain in a week.
Monday is a legal holiday and the price action should be subdued today.