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The economic news continues to disappoint and we can add GDP to the list of misses. Fortunately, a decent round of earnings releases has kept sellers at bay. That could change next week.
ISM manufacturing, ISM services, ADP and the Unemployment Report will be released next week. This same cycle of economic data started the month off on a sour note. Traders discounted the news because we had a similar dip in April 2012. Since then, Empire Manufacturing, the Philly Fed, Chicago PMI, the Beige Book, housing starts, durable goods orders and GDP have disappointed. I don’t believe this was a seasonal adjustment, conditions seem to be slipping.
The market continues to discount this as a “one off” event and I believe any surprise favors the downside. If the numbers come in soft next week for the second month in a row, profit takers will hit bids. Asset Managers will not chase stocks near an all-time high when economic conditions are fragile and they will back off. Translation: the market will pullback and it could hit an air pocket.
China’s flash PMI missed expectations and so did industrial production, retail sales and GDP a week ago. The Chinese government is satisfied with current growth and they do not plan to stimulate economic activity.
Europe is in horrible shape and regional weakness has spread to Germany. It has been the cornerstone for stability. This week the flash PMI came in at a very low level and the new orders index hit a five-month low. Car sales have not been this low in over a decade. GE and IBM lowered EU growth forecasts for 2013 when they posted earnings and they said that there are no signs of improvement.
Earnings season seems good until you look under the hood. Estimates were lowered and that is why 65% of companies that have reported have exceeded profit projections. However, only 40% have beaten on the top line. Year-over-year comparisons paint a much different picture and revenues are flat.
Cost-cutting has preserved profits and cash flows are strong. At a forward P/E of 15, stocks are still relatively attractive due to a lack of investment alternatives.
Now that earnings season has peaked, I believe the focus will shift to economic releases. Fiscal spending cuts will start to kick in and that could topple an already fragile recovery. Investors will “sell in May and go away”.
I don’t pick tops and I need proof that the top is in. A rally that reverses is one warning sign. We got a small one yesterday. I also want to see follow-through selling and we are seeing some this morning. I am not reading too much into this because the market challenged the all-time high. However, if I see selling late in the day and follow-through Monday, I will take notice. If SPY 155 fails, I will buy puts. I won’t add until we test SPY 153.
If you have bullish positions, take profits and reduce risk. If I am completely wrong and the economic releases show strength next week, the market will rally. You can get back in once we have a bona fide breakout on good news. As I mentioned earlier, any surprise favors the downside and the risk/reward profile does not justify staying in the market.
I am day trading and I want to see how this all plays out. The market looks choppy today and it has a slightly negative tone to it. We could see selling later in the day.