Last week, the market staged a nice rally on minor economic releases. We have been in a news vacuum and the market is searching for the next driver. Light volume rallies often lead to a round of profit taking and this morning stocks are trading lower. This is merely a speed bump.
Euro credit concerns are back in focus, but this news it not too alarming. Cyprus will vote on a bailout after the close. Bank accounts might have to shoulder a 10% tax. If the vote does not pass, there could be a run on banks. This news sounds dire, but it is not. We are talking about €10 billion bailout.
The bigger news this week will come on Wednesday when flash PMI’s are released. The expectations for Europe are low and any surprise favors the upside. Economic conditions in the US are improving and our number should be good. China is the wildcard. The PBOC has recently tightened and traders are wondering if that will impact growth. China has hit a small soft patch and the news could spark a little selling.
I’ve been suggesting a very controlled approach to this rally. When your exposure is minimal, it is easy to whether these pullbacks. Instead of viewing them as a threat, you’re able to keep your perspective and you are able to take advantage of the opportunity.
US economic conditions are improving and analysts will raise earnings estimates. FedEx will post results Wednesday and they are considered an economic barometer. The earnings will be a little light due to fuel costs, but the guidance should be positive (guidance is the key).
Asset Managers will pull their bids for a few days to gauge selling pressure. After the flash PMI’s, they will get more aggressive. They want to buy stocks into earnings season. Many Asset Managers have been waiting for a 5% pullback and they haven’t gotten one. With each passing week, they will get more anxious. Earnings season is only a few weeks away (April 8th).
The S&P 500 will back off from the highs and it will consolidate the first half of the week. There is strong support at SPY 153 (breakout a few weeks ago). It will gather strength and I believe we will challenge the highs Friday or early next week.
I currently have 40% of my desired call position and I will add this week. Even with today’s decline, my positions are still profitable and I have breathing room.
I suggest buying May calls once support is established. They will hold their value much better than April options.
Evaluate current positions. If your stocks are holding up well, they still have room to run and they will rally with the market. If they easily shed recent gains, they might be out of gas. Consider rolling out of these positions and into stronger stocks. This pullback is a great opportunity to evaluate your holdings.
Be patient and add to call positions later this week.