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After a good round of earnings releases, the market is challenging the all-time high. It ignored dismal economic releases and a breakout seems imminent.
The earnings news has been good, but not great. Most companies are beating earnings estimates, but only 40% have exceeded revenue projections. Q1 expectations have been lowered and we should expect many “beats”. On a year-over-year basis the results are not very impressive.
Revenues are flat and profit margins are healthy due to cost-cutting. Cash flows are hitting record levels and balance sheets are strong. At a forward P/E of 15, stocks are still relatively attractive. Money continues to flow into US equities due to a lack of investment alternatives.
Demand is the biggest concern. Global economies are starting to slow. Europe is in bad shape and the cornerstone (Germany) is loose. The EU is in a recession and the flash PMI numbers were dismal. Everyone is expecting the ECB to ease next week.
China’s flash PMI also declined and that comes on the heels of disappointing economic releases a week ago (industrial production, retail sales and GDP). Government officials are satisfied growth and they do not have stimulus plans.
Last month’s domestic economic releases (ADP, ISM manufacturing, ISM services and the Unemployment Report) set a negative tone. Traders are discounting the news as a seasonal adjustment since we went through a similar dip in April 2012. Empire Manufacturing, housing starts, the Philly Fed, the Beige Book and durable goods orders all missed consensus estimates. This looks like more than a seasonal adjustment and any surprise favors the downside.
Next week, traders will closely monitor these major releases. If the trend points to slower activity, the market will decline. Fiscal spending cuts have started and that will make matters worse.
I don’t believe traders will be able to shrug off next week’s news. A second consecutive month of dismal growth will spark profit taking. The bid is not as strong as it was a month ago and the SPY will test support.
If economic conditions were stable, Asset Managers would be worried that they will miss the next big rally and the bid would be very strong. Given this recent soft patch, they will not chase stocks at an all-time high. They will wait for confirmation that activity is improving.
I am not going to pick a top. I have 1 foot on the gas pedal and the other on the break. I am not ready to shift into reverse unless I see an intraday rally that reverses sharply with late day selling and follow-through the next morning. If technical support is breached and the market falls into a pattern where it opens on the high and closes on the low, we will know that the trend has reversed.
I am day trading and I want to keep my overnight exposure low. I believe the news next week has a negative surprise component. If you are long, take some money off the table. I might miss the last one or 2% of this rally, but I won’t have the rug pulled out from under me.