Last week, the market surged to new highs. Stocks got a little overextended and we saw a little profit taking early in the week. Asset Managers pulled bids to gauge selling pressure and this morning support has been established. We are heading into the summer doldrums and volumes will drop off.
Earnings season is winding down and these are some of the worst comps we’ve seen in years. Asset Managers are focusing on record cash flows and stock buybacks. Corporations are lean and mean and any uptick in demand will go straight to the bottom line.
Economic releases have been good. GDP, ADP, ISM manufacturing, Chicago PMI and ISM services all exceeded estimates. This morning initial claims came in at 333,000. The four-week moving average has dropped to its lowest level since November 2007.
Global conditions are also improving. China’s PMI was better than expected last week and the economic releases last night (trade balance, CPI and retail sales) were good. Government officials said that they won’t tolerate a growth rate under 7%. Traders will take comfort knowing that there is a safety net. There was a silver lining to last night’s trade numbers. Exports to Europe increased 3%.
Analysts have been calling for a bottom in Europe for many months. The official PMI for July ticked into positive territory for the first time in many months. Last night’s trade numbers from China support the notion that conditions might actually be improving in the EU. Any sliver of good news will go a long way.
Politicians won’t spoil this rally. Congress is in recess and the debt ceiling rhetoric will be subdued for a few weeks.
We are heading into a news vacuum and that favors the current trend. Bears will not step in front of this freight train. Asset Managers won’t chase stocks at an all-time high, but they will buy dips. The bid remains strong and bullish speculators will nibble.
Traders are accepting the fact that the Fed will taper. Bond purchases will decline, but monetary policy remains accommodative.
As long as the SPY stays above $167, I will focus on bullish trades. Look for horizontal breakouts that followed strong earnings reports. These moves are sustained and the momentum typically lasts a few days. When the move stalls, take profits and look for the next opportunity.
Traders typically take time off in August. Volumes will dry up and the price action could get boring. The market might not move much, but there will be individual stories to trade.
Look for quiet trading and a gradual drift higher.