Last Friday the market hit an air pocket. Light post-holiday trading did not attract buyers. Once the downward momentum was established, Asset Managers pulled bids. Bullish speculators bailed and we had a nasty little decline.
This morning, official PMI’s came in a little better than expected. China and Europe beat analyst estimates. Any improvement in Europe will attract investors.
Half an hour after the open, ISM manufacturing was released. It fell to its lowest level since November (49) and the market sold off on the news. Now that earnings season has ended, the focus will shift to economic releases. Wednesday will be important and ADP, ISM services and the Beige Book will be released. I am expecting mixed results and sluggish growth.
Durable goods orders were better than expected last week and so was Chicago PMI. I am not overly concerned with ISM manufacturing. Analysts are expecting 165,000 new jobs when Friday’s Unemployment Report is released. Initial jobless claims have been decent in recent weeks and we should be able to hit that number. If we do, Goldilocks will remain intact.
As long as conditions are stable, the Fed will not taper. They want to see the impact of the sequester before they tighten and we might be seeing the first signs in today’s manufacturing number.
All of the bullish pieces are in place. China’s growth is stable (7.7%), European credit concerns are low, growth in the US is decent (2.4%) and central banks around the world are printing money. Earnings growth is slow year-over-year, but cash flows are hitting record levels. Corporate balance sheets are strong and companies are using cash to buy back shares. At a forward P/E of 15, stocks are attractive relative to bonds.
The market is overbought and bullish speculators need to be flushed out. That is exactly what’s happening and this is why I am gradually scaling into call positions. I was planning to add last Friday, but the selling was persistent. There was no reason to buy calls ahead of the weekend.
Support at SPY $164 has failed and Asset Managers are still bidding passively. They want to gauge the selling pressure. Once they sense support, they will rush back in.
Pullbacks will be shallow and brief. The news today was not good, but it wasn’t disastrous either. I am waiting for a snapback rally off of the lows of the day and I want to see the market grind higher. That price action will tell me that this dip is run its course. It may/may not happen today. If you want to play it safe, add when the SPY crosses back above $164.
You should have your bullish candidates lined up by now. Look for stocks that are in an uptrend, consolidated in a horizontal range, broke through resistance and are now testing that breakout. Ideally, they will be “popping” every time the market tries to bounce. If the stock closes below the breakout, stop the position out. This is a very effective trading strategy and the rule-based is simple to follow.
Wait patiently and watch for signs of support. In particular, look for that intraday low and sharp reversal that never looks back.
I have one third of my normal call position on right now and I will add if we make it back into positive territory and I see buying this afternoon. If we don’t get this, I will wait.