The market hit a soft patch this week. Don’t read too much into it, this is normal consolidation and the S&P is gathering strength for its next run. I believe this is a good time to add to May call positions. Plan to add next week as well.
Cyprus was a distraction this week. Government officials are currently meeting to form a “bad bank”. They intend to quarantine the problem so that they can open banks next week. This should be resolved quickly.
Credit conditions in Portugal, Spain and Ireland are improving and PIIGS yields remain stable. European credit concerns casted a dark cloud over the market last year and I don’t believe they will be an issue for at least a couple of months.
China’s flash PMI was better than expected. The PBOC has been tightening and this was a legitimate concern. They have worked through a soft patch and this “fly in the ointment” will not be an issue during the next few weeks.
Domestic economic growth is stable and this week the Fed maintained its economic projections. Even with the sequester, GDP is expected to grow 2% in 2013. This is a Goldilocks scenario (not too hot, not too cold) and the Fed will remain accommodative.
The earnings this week were a bit negative. FedEx and Oracle missed expectations. FedEx blamed Europe and Oracle blamed its sales force. Yesterday, Nike beat estimates and the stock is trading higher today. Corporate balance sheets are stronger than ever and they are generating great cash flow. They are using that cash to buy back shares and that is keeping a bid under the market.
The dividend yield on the S&P 500 is higher than the yield on US 10-year Treasuries. Asset Managers want to rotate into equities and they haven’t gotten the 5% dip they were looking for. With each passing day they grow more anxious.
Mutual funds have underperformed the market and managers will buy stocks next week. They want to add before the end of the quarter (window dressing).
At a forward P/E of 14, stocks are attractively valued. The market will rally into earnings season (April 8th).
It is time to add to call positions. We have been waiting patiently and the time has come. I am buying calls today and I will add next week. I have 50% of my target position and I will take that up to 65% next week.
Buy May calls. As I have been mentioning this week, they will hold their value relative to April options.
The market has a full head of steam today and the buying has been persistent. I believe the S&P 500 could challenge the all-time high today.