Day Trade and Wait For Initial Claims and Bank Earnngs.
Yesterday, you could hear a pin drop during the first four hours trading. The S&P 500 was in a tight two point trading range for over an hour. Late in the day, buyers came in and the rally gained traction. The backdrop has changed and I am not as optimistic as I was a week ago.
Domestic economic releases were very disappointing last week. Only 88,000 new jobs created in March and analysts were looking for twice as many. Initial jobless claims (not included in this Unemployment Report) spiked by 40,000. Our economy hit a soft patch last April and traders are willing to give it a “free pass” for a few weeks. However, if initial jobless claims remain high this Thursday, we could see profit taking. ADP’s report last week was also disappointing.
To make things worse, ISM manufacturing and ISM services came in substantially below expectations.
The readings are still above 50 and that indicates economic expansion.
The real problem from my perspective is the sequester. Spending cuts will take effect in coming weeks and we needed to have a full head of steam heading into May.
President Obama will present his first budget in four years this week. Rumor has it that both parties will not be happy. I hope that is the case because it will mean that both sides will have to make concessions. My guess is that minuscule entitlement reform will be accompanied by tax hikes (closing loopholes). There will be plenty of wrangling in DC. The market does not want higher taxes and stimulus spending.
China’s economy is still on track, but there is skepticism. Their market is down this year and it is resting just above the 200-day moving average. One bad number could break major support (flash PMI). The PBOC has been tightening and that has investors spooked. We will also have to monitor the recent outbreak of bird flu.
I am not overly concerned with European credit concerns because PIIGS yields are stable. However, I am concerned with their lack of economic activity. The EU is in a recession and it is a drag on global demand.
Alcoa kicked off earnings season yesterday and the reaction was decent. They still see growth in China and basic material stocks are rebounding today.
Bank stocks will be the key to the next leg of this rally. I am expecting good results from JPM and WFC this Friday.
I feel that the recent round of domestic economic releases has weakened the bid. Asset Managers will wait for the next round of news before they chase stocks. They want to make sure that our economy is not rolling over.
Revenues this earnings season will be flat, but profit margins will be healthy. Investors will buy stocks because they are attractive relative to bonds. Cash flows will hit record levels and balance sheets have never been stronger. The rally will be tenuous and traders will keep one eye on US economic releases.
I sold my calls late yesterday and I locked in nice profits. I’ve had some of those positions for a few weeks and it feels nice to start with a clean slate. I will day trade this week and I will evaluate the price action after initial jobless claims, the President’s budget and bank earnings reports.
Look for stocks that are breaking through horizontal resistance on strong volume after a period of consolidation.