April 1, 2013
Last week the S&P 500 closed at a new all-time high. The volume was light, but that will change this week. Major economic releases will drive the price action. ISM manufacturing came in much lighter than expected this morning (51.3 versus 54.0). The market sold off on the news and the backdrop was a little tenuous going into the open. China's official PMI missed estimates and their market rebounded on news that property prices increased. As long as China's economic growth is stable, the market will rally. The PMI's were consistent with an 8% GDP and this concern should not be an issue heading into Q1 earnings season. Tomorrow, Europe will release its official PMI. The flash number was extremely weak and it could spook investors. The expectations are low and the concerns should dissipate quickly. Cyprus will gradually recover from its banking crisis and credit concerns will remain low. Italy will not be able to form a new government and some are suggesting that current technocrats retain power (that would be bullish). Portugal, Ireland and Spain are on the mend. Almost every domestic economic release in the last month has exceeded estimates. Jobs are gradually recovering and the consensus estimate for Friday's Unemployment Report is 190,000. That is consistent with the Goldilocks recovery (not too hot and not too cold). The Fed will remain accommodative for many months to come. Asset Managers have been waiting for a 5% pullback and they haven't gotten one. With each passing day they grow a little more anxious. Earnings season is right around the corner and the S&P 500 is at an all-time high. US 10-year bond yields are lower than the dividend yield on the S&P 500. Topline growth will be flat, but profit margins will be healthy. Corporations have strong cash flows and balance sheets have never been better. At a forward P/E of 14, stocks are attractively valued. The pullback this morning is a buying opportunity. I will be adding to my call positions. Buy May options. They are less exposed to time decay and because they span earnings season, the IVs will hold up. I still believe the market has gas in the tank and should see one last push higher before we hit resistance. Look for stocks that are breaking through horizontal resistance on strong volume. The selling should ease this morning and support will be established. The overnight news was not that damaging and stocks should be able to recover. We could see a little weakness tomorrow on Europe's PMI, but the rest of the week should be strong. . .
Daily Bulletin Continues...
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