The Market Needs Time – Buyers Will Return Gradually. Patience Will Be Rewarded
The market partied like mad in 2013 and now it is nursing a hangover. Last week we saw a small round of profit taking on very light volume. The holiday shortened week and extreme weather conditions have kept traders off the floor. Buyers will gradually return throughout the week and the bid should stabilize.
Earnings season kicks off on Thursday but it won’t crank up for a couple of weeks. Financials will dominate the scene in the early going and the reaction should be bullish. Interest rates are creeping higher and the Fed plans to maintain its zero rate interest policy (ZRIP). That means spreads will expand and banks will benefit. Economic conditions have been good and bad debt write-downs will decline. The strongest companies release earnings at the beginning of the cycle and stocks tend to rally into the news.
The last remaining dark cloud is the debt ceiling. It won’t be an issue for a month because traders will assume that the GOP will negotiate. The budget was passed with relative ease and Republicans want to stay out of the headlines until the November elections.
Global PMI’s were a little light last week, but there were some silver linings. EU peripherals like Spain posted better-than-expected results. Any recovery in Europe will push global markets higher.
ISM manufacturing was better than expected last week and today, ISM services came in a little soft. Job growth in December should hit 200,000. Now that the taper is out-of-the-way, this number will be less scrutinized.
The FOMC minutes on Wednesday will not spark much of a reaction. There has been plenty of “Fed speak” in the last two weeks and most of the news is already in the marketplace.
Earnings season will be in focus and we could see a few warnings in the next couple of weeks. SCSS and HGG warned today and that could be a bearish sign retailers. Many stores will post results this week and we will be able to gauge the health of consumers. The news should have a negative bias, but misses will be blamed on bad weather and a short holiday shopping season.
Corporate balance sheets are stronger than ever and cash flows are at record levels. Companies are buying back shares at a record pace and that will continue.
The market needs to gather strength after a huge run. Be patient and wait for the volume to return. I am on the sidelines and I won’t nibble unless the SPY is able to trade above $184. When I do start to scale in, I will keep my size small and I will buy February options. I don’t believe we will see much action in the next two weeks and time decay will be in issue for January expiration.
Resist temptation as long as possible and you might be rewarded with a better entry point. The market looks a little vulnerable today and we could see some afternoon selling. I would not be surprised if we test support at SPY $181.50 in the next week.