Posted 11:00 AM ET – Thank you for posting your reviews on INVESTIMONIALS I am close to my goal of 200 five-star reviews and I won’t ask again until we get the breakout. It won’t be long.
Last Monday we had a soft start to the week. A light round of profit taking got the ball rolling and bullish speculators were flushed out of positions. On Tuesday, we rebounded sharply. That price action demonstrated a strong bid. To my surprise, we did not see any follow-through.
Stocks opened higher this morning and the gains have evaporated. I don’t want to read too much into this price action. The reality is that the S&P 500 is at an all-time high and we should expect heavy resistance. As the market treads water at this level, the bid will grow. This is like a pressure cooker.
Earnings season will shift into high gear this week. Analysts are expecting profits to grow 7% and half of the companies have exceeded estimates. The releases today were solid and the good news will build with each passing day.
Financials moved higher after posting last week. Spreads are expanding and this is good for profits. Regional banks will release this week and the news will be positive.
Intel’s numbers were pretty good. Most importantly, enterprise was strong and corporate IT spending might be rebounding. PC sales also seemed to bottom out last quarter. This bodes well for the entire tech sector. Some of the tech high-fliers have pulled back and they have room to run.
Cyclical stocks will benefit from improving conditions in Europe. The EU has weighed on global markets for years and this turnaround could be a major catalyst. China’s growth is stable and their government is targeting 7.8% growth this year. That means that any soft patch will be met with fiscal stimulus and monetary easing.
China posted GDP growth of 7.7%, industrial production grew 9.7% and retail sales were up 13.6%. All of these numbers were in line, but just a little below expectations. The PBOC provided a liquidity injection and Asian stocks rallied.
The macro backdrop is extremely bullish. Central banks are printing money and global credit concerns are very low. Economic conditions are improving around the world and Europe could be the key to the next leg of this rally. Corporate guidance should be upbeat. The GOP will extend the debt ceiling and they will stay out of the headlines. Companies will produce record cash flows and they will use that money to buy back shares. More than 6% of the daily market activity is attributed to repurchases and this is a record pace.
P/E ratios might be a little rich. However, corporations are lean and mean. Any uptick in demand will go straight to the bottom line and the “E” portion of this metric will explode. Consequently, I do not feel that valuation is an issue. The dividend yield on the S&P 500 is higher than the yield on 10-year US Treasuries and stocks are attractive on a relative basis.
My trading horizon is 3 to 4 weeks and I do not see any speed bumps.
You should have established the first leg of your long positions – some of you might have completed your long positions. I have a full boat and I am not sweating any choppy trading above SPY $183. I feel that a rally to a new high is days away.
If you are still looking to add, wait for a close above SPY $184.50. Focus on stocks that are in an uptrend, have consolidated and are breaking through horizontal resistance. This pattern produces sustained moves and these stocks already have the momentum we are looking for. Once the market breaks out, they will lead the way.