The S&P 500 is sitting just below the all-time high. We are in “show me” mode and the market needs constant reassurance. The numbers this week have been a little soft.
China’s PMI was mixed, Europe’s PMI was dismal (expected), ISM manufacturing was light and ADP was 40,000 short of expectations. February’s ADP number was revised upward by 30,000 so this was a wash. A few minutes ago, ISM services was released. It came in at 54.4 and expectations were 55.5. This is the lowest reading since November. It is still a good number and I wouldn’t worry too much about it.
Tomorrow, the ECB/BOE will release their policy statements and initial jobless claims be released. Some traders are expecting the central banks to ease, but I believe that is unlikely.
Initial claims will be watched closely after rising 7000 a week ago. If initial jobless claims continue that trend, the estimates for Friday’s jobs report could come down (190,000).
All of this information sounds a little bearish, but it is not. The numbers are still consistent with a Goldilocks economy. Growth is slow but stable and the Fed will remain accommodative.
We might not be off to the races, but the bid is strong and Asset Managers are anxious to get in. That means that any decline will be brief and shallow.
If Friday’s jobs report disappoints, the next round of good news will come when banks post results. Basic materials have lowered guidance and Alcoa’s forecast (April 8th) will seem a bit concerning. A few days later, banks will report strong profits. Write-downs have been greatly reduced, new loans are on the rise, property prices are improving, trading activity has been healthy, asset management fees are higher and investment banking is back. Financial stocks will dominate the earnings scene and I believe they will drive the next leg of this rally.
I’m not worried about European credit concerns for the next few weeks. China’s property prices are on the rise and I am not concerned about real estate restrictions in the next few weeks. These are a couple of nagging issues, but they won’t stand in the way this rally.
It is going to take good news for this market to breakout. When it does there will be follow-through. Stocks will open on their lows and close their highs.
I am long May calls and I have some dry powder. If we get a pullback I will add positions. In particular, I will focus on stocks that have broken through horizontal resistance on strong volume and have retreated back to that breakout. If it holds, that will be an excellent entry point.
The market will go the way of the headlines. If the numbers are soft, we will pull back slightly. The dips will be shallow and brief.
If the news is good, we will get the breakout we have been waiting for and you need to watch for the pattern I outlined above.
Buy a dip or a breakout – hold on to your longs.