Ride the Wave and Take Profits Along the Way. Possible Speed Bumps Ahead.

April 11, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market hit new all-time highs yesterday and it is off to the races today. Bad news is being discounted and under-allocated Asset Managers are buying ahead of earnings season.

Initial jobless claims spiked last week and that turned out to be a seasonal anomaly. Traders discounted the number last week when it came out. This still does not account for the dismal jobs reports last week. April 2012 had a similar dip and the dismal employment number is still getting a “free pass”. If this continues, the reaction will be much different when May’s number is released.

ISM manufacturing and ISM services were also disappointing. Our economy needed a full head of steam before sequester spending cuts take effect. If the economy is slowing before the cuts, we could be hit with a double whammy.

The FOMC minutes were leaked yesterday. That removed some uncertainty and stocks charged higher. Surprisingly, the Fed’s tone was rather hawkish. Traders dismissed the minutes because the FOMC was not armed with the economic data released last week. In theory, the rhetoric could have been different given the most current news.

President Obama delivered his first budget in four years. He did make some concessions, but both parties are miles apart. The good news is that there might be room to negotiate.

Earnings season is upon us and the expectations are high for JPM and WFC tomorrow. The reaction will be critical since it will tell us if all of the good news is already priced in. Major releases will begin next week.

A key piece of information will be released Sunday night. Traders have been monitoring China and there could be signs of a slowdown. The PBOC has been tightening and their market is down 2% in 2013. It is resting just above the 200-day moving average and a whiff of bad news could spark selling.

China will release industrial production, retail sales and GDP over the weekend. Stable growth will not result in a US market rally, but a weak round of news could result in profit taking after a nice rally.

If it sounds like I am bearish, I’m not. I’ve been bullish all year and I felt that Asset Managers would get anxious ahead of earnings season since they did not get the 5% pullback they were hoping for. They bought ahead of earnings season and we broke out to new highs. The market still has some gas left in the tank, but I am in profit management mode.

The economic backdrop might be changing. Europe is extremely weak and the US could be struggling. If China stumbles, stocks will retreat.

Be prudent and take some chips off the table. I don’t believe Asset Managers will chase at this level given that there is economic uncertainty. Good earnings news is priced in.

“Sell in May” cold simply take us back to where we were a few weeks ago. If European credit concerns remain low and our economy can absorb the sequestration, a great buying opportunity will present itself.

Ride the wave and take profits along the way.
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