Last week, the Dow Jones surged to a new all-time high. The S&P 500 is only 15 points away from doing the same. Momentum should carry us higher during a quiet news week.
Asset Managers have been waiting for signs of an economic recovery. Most analysts believe that we are coming out of a trough and the recent releases (GDP, durable goods, Chicago PMI, ISM manufacturing/services, Beige Book, ADP, initial claims and the Unemployment Report) support that theory. The news has been excellent and earnings estimates will be raised.
Q4 earnings season has just about ended and in a few weeks, we will start focusing on Q1. As we get closer to April, the bid will strengthen. I suggest gradually building call positions. Time decay will be an issue and I suggest buying May options.
We are in a news vacuum this week and the volume will be light. Earnings season is winding down and the major economic releases are behind us. Credit concerns in Europe are low and there isn’t much to stand in the way of this rally.
China posted industrial production and it was light. Some analysts believe that the Chinese New Year might have impacted activity. In any case, traders want to see continued growth in China. It is a major puzzle piece and the PBOC tightened couple of weeks ago.
President Obama had dinner with Republican Senators last week. John McCain gave two thumbs up and over the weekend Paul Ryan said that a budget deal is possible. These are positive developments and if a deal comes to fruition, the market will jump.
I still believe the market has one good push higher. As we get closer to earnings season stocks will grind higher. Asset Managers that are under allocated will aggressively add to positions when they don’t get a dip. Improving economic conditions can no longer be ignored.
We had a similar backdrop one month ago after major economic releases. Volume tapered off and stocks gradually work their way higher. I believe we will see that pattern repeat. Remember that the move was all “fluff” and we had a couple of nasty one-day declines after that. That is why I am telling you to gradually add.
Gradually add to call positions. Know that time decay will be an issue and that one-day drops are likely. The momentum will pick up in a couple of weeks.
This should be a very boring day and we should finish on the plus side.