What a week for stocks. The market broke out to a new all-time high as earnings season kicked off. Surprisingly, the news has not justified the rally.
The jobs reports last week were dismal and ISM services/ISM manufacturing missed expectations. The FOMC minutes were rather hawkish and politicians are still miles apart on the fiscal budget. Traders ignored the news and they managed to find the silver lining in every release.
In 2012, our economy hit a soft patch in April. This is providing a false sense of security. If domestic activity does not improve in May, the reaction will be much different. From my perspective, we needed a full head of steam before fiscal spending cuts are initiated.
The FOMC minutes were discounted because Fed Officials were not armed with recent economic data and their tone would have been different. My interpretation is that they are starting to lean towards tightening. As soon as the economy shows improvement, they will start to move.
The President has offered miniscule entitlement reform and he wants higher taxes in exchange. The market views this as sign that there is room to negotiate.
We won’t know how all of this plays out for a few weeks, but we will get snapshots along the way. Sunday night, China will post major economic releases (industrial production, retail sales and GDP). Stable economic growth is vital to this rally. I believe the results will be decent and they will not spoil this rally.
However, the risk is on the downside. China’s market is down 2% in 2013 and it sits just above the 200-day moving average. Any sign of weakness will spark selling. The PBOC has been tightening and that is a concern. They have also had an outbreak of bird flu.
Next week there will be some minor domestic economic releases. Traders will be watching Empire Manufacturing, the Beige Book, the Philly Fed and initial jobless claims. Any decline will weaken the market bid.
This morning, J.P. Morgan Chase and Wells Fargo posted results. The numbers were good, but the stocks pulled back. Good news was already priced in. That might be the case for most stocks and the gains from here will be hard-fought.
Asset Managers are not going to chase stocks near all-time high unless they have reason to believe that an economic recovery is underway. The last round of data has given them some breathing room and they will wait for confirmation.
As I’ve been telling you, I don’t trust this market. The news last week was very damaging. I have been day trading and I have been able to capture the rally without taking overnight risk. This strategy has worked well and I’m glad to be on the sidelines this morning.
The S&P 500 is drifting lower, but it should find support. This is just a normal round of profit taking and stocks got a little frothy.
Look for a bounce mid-day. Use that move to lock in some of your profits. I believe there are some speed bumps ahead and you will have an opportunity to get back in.
It’s the overnight risk that scares me the most. I won’t buy calls until we pullback and find support. I also need to know that growth in China is on track.