The market is taking a breather and it might still have a few days of nervousness before it starts the next leg of the rally. We have been in a news vacuum and that will change next week.
The Nikkei declined 5% Wednesday night, but the market took it in stride. Japan’s stock market is still up 30% this year. There are concerns that China’s economy is slowing and officials do not have any stimulus plans. The second largest economy in the world is still growing at a 7.7% clip and this should not spoil the rally.
GDP came in as expected and initial jobless claims rose 10,000 yesterday. Germany’s jobless rate was a little higher than expected and unemployment in the EU is running at 12.2%. This morning, Chicago PMI and consumer sentiment came in better-than-expected. The combination of these releases paints a mixed picture and that is perfect. We want the Goldilocks scenario to continue so that the Fed remains accommodative.
We should see a similar mix of news next week. Official PMI’s will be released Monday morning and they will come in light. ISM manufacturing and ISM services will be stable. ADP and the Unemployment Report should show job growth in the 150,000 range. Sluggish, stable growth is bullish for the market.
Europe’s economy is dismal, but most analysts believe that they are bottoming out. Any uptick in demand will spark optimism. The EU is forging a centralized banking authority and credit concerns will remain low. PIIGS yields are stable and this dark cloud will not haunt us this summer.
Earnings season has ended and the results were decent. Cash flows are hitting record levels and balance sheets have never been stronger. Corporations are using that money to buy back shares.
Interest rates are starting to creep higher and the US 10-Year Treasury is yielding as much as dividends on the S&P 500. We haven’t seen this condition in months and it might be signaling a rotation out of bonds and into equities.
Asset Managers won’t chase stocks near all-time high. They will gather information and the bid will strengthen over the next week or two. When this soft patch runs its course, the market will rally to a new all-time high.
I have a third of my normal call position on at this time and I will add this afternoon if we hold this level. At worst, the SPY will test $164 next week. That was the low from a week ago and we never came close to testing it this week.
Call buyers are taking heat this week and time decay is taking its toll. Some of the fluff has come out of the market and that is constructive.
Get long and add on weakness. Look for stocks that have broken out through horizontal resistance and are testing that breakout. Ideally, they are already trying to move higher in this flat market.
The action is very light today. The tone is slightly negative, but domestic economic releases should keep a bid to the market. I believe we will finish unchanged for the day.