As I’ve been saying for weeks, the market wants to rally. The only thing keeping a lid on it was the debt ceiling and that has been pushed back a few months. Asset Managers are loading up and any dip will be brief.
The macro backdrop is very bullish. Credit concerns are minimal and PIIGS interest rates are stable. Central banks are extremely accommodative and they will remain so throughout 2013.
In the US, the Fed will not taper until the debt ceiling has been extended by a year. Janet Yellen will take office and she will have a chance to get her feet on the ground. That means we won’t see tapering until 2014.
This round of debt ceiling debates went poorly for Republicans. They will abandon efforts to repeal/postpone Obamacare and they will focus on spending cuts and entitlement reform. If they push too hard, they will hurt their chances of winning the Senate in 2014 and they could lose the House. The GOP has taken a big hit in the polls and the next round of negotiations should be more subdued.
Democrats will push for higher taxes and they will try to close loopholes.
Economic conditions are improving in Europe and China. Manpower (job placement agency) just reported an uptick in European employment. China’s economy is also improving and they posted better-than-expected results last week (industrial production, retail sales and GDP). Flash PMI’s will be released Thursday morning and they should be “market friendly”.
The US will release the September jobs report tomorrow. From my perspective, it can only be positive. Analysts are expecting 180,000 new jobs. If we exceed estimates, the market will rally. If the number comes in light, traders will blame it on the government shutdown and the release will get a free pass.
Earnings have been decent. Financials are weighed down by lower trading volumes and refi’s. Legal expenses are also an issue and J.P. Morgan will pay a $13 billion fine to the government. Retailers have also been warning. Apart from these two sectors, the results should be good.
Google got tech stocks rolling last week and we will hear from Netflix and Amazon this week. Apple and Facebook will post results next week.
Cyclical stocks should lead the next leg of this rally. GE posted excellent results last week and they set the tone. Profit margins are healthy due to cost-cutting and any uptick in demand will go straight to the bottom line. Basic materials could also rebound after better-than-expected results were posted by Rio Tinto. Guidance will be the key for these stocks.
Overall, revenues will be flat and profits will inch higher. Cash flows will hit record levels and balance sheets have never been stronger. Companies are using their money for M&A and buybacks.
I don’t see any speed bumps on the horizon. The meat of the year-end rally will come over the next few weeks.
We entered our long positions at an excellent level – let the profits run. The market will only be vulnerable to profit taking if we see a huge blow-off rally. I don’t see that happening.
All of the major news events are out-of-the-way and the element of surprise is gone. Shorts have covered and that reduces the chance for a huge pop. Tapering and the debt ceiling still loom and that should prevent a runaway rally.
We want a nice orderly grind higher and I believe we will get one. Ride your long positions and watch cyclical stocks. Look for strong uptrends and horizontal breakouts to a new relative high. These stocks will run for at least a few days.
Stocks are taking a breather today after a big run last week. The bid will strengthen as the week progresses.