Yesterday stocks pulled back. China’s PMI and a weaker than expected ISM manufacturing report weighed on the market. The news was not too damaging and the losses have been erased this morning.
After being closed the last four days, European markets opened to the plus side. The official PMI was dismal, but that was expected. Some traders believe the ECB will ease when it releases its statement this Thursday. I don’t believe that is likely.
Italy’s political mess continues, but yields declined overnight. Conditions in Ireland, Portugal and Spain continue to prove (from credit standpoint) and European credit concerns should remain subdued for at least a few weeks.
China’s market was down overnight and it is 8% off of the highs this year. Real estate restrictions continue to weigh on their market. China’s economic growth is stable and still looks poised to exceed 8% in 2013. The official PMI was decent and I don’t believe China’s economic activity will stand in the way of this earnings rally.
Tomorrow, ADP and ISM services will be released. I believe both numbers will be “market friendly” and the market will make a new all-time high. Initial jobless claims continue to decline (four-week moving average) and analysts are expecting 190,000 new jobs in March. This would be a Goldilocks number.
Earnings season kicks off next week. Alcoa will post results on April 8th and the first report could be a little gloomy. Basic materials stocks have reduced forecasts and they have been in a downtrend. Banks will dominate the scene after that and the news will be good.
In Q1, revenues will be flat, but profit margins will be healthy. Corporations are lean and mean and cash flows will strengthen balance sheets. Any future uptick in demand will go straight to the bottom line.
U.S. 10-Year Treasury yields are lower than the dividend yield on the S&P 500. At a forward P/E of 14, stocks are attractively valued. Asset Managers want to rotate out of fixed income and into equities. They did not get the 5% pullback they were looking for and they are getting anxious.
We are in the final stages of this rally and the market requires proof on a daily basis. All of the economic releases in the last month have been bullish and that need has been satisfied.
As long as European credit concerns remain low (likely) and China’s economic growth is stable (likely), we will get an earnings rally. It should last for a few weeks and the market will grind higher.
I am long May calls and I have two thirds of my target position on. I don’t plan on adding unless I see constructive price action. The market needs to grind higher and it needs to finish the trading day on strong note. My positions are profitable and I have a nice cushion. I’m still playing it safe and I want to keep some of my powder dry.
The rally this morning is strong. It should continue tomorrow after decent economic news.
You should have nice profits at this stage and a decent sized call position. We have been building for weeks and now we are in profit management mode. This is where it gets fun.