A week ago, the market hit an air pocket and the Dow declined 300 points. Stocks spent the rest of the week recovering and we are within striking distance of a new five-year high. Bullish speculators were flushed out and investor sentiment has deteriorated. From a contrarian standpoint, that is a good sign.
As I’ve been saying for the last couple of weeks, the market needs time and information. Asset Managers will not buy stocks near an all-time high without a good reason. Last week’s news was bullish and another round of good news this week could do the trick.
GDP was revised into positive territory, housing starts were excellent, Chicago PMI hit an 11 month high, ISM manufacturing was better than expected and initial jobless claims declined by 22,000. The Fed will continue to ease and they intend to carry a huge balance sheet well into the future. This means the Bernanke put is in place and it now looks like a LEAP option. Any decline will be shallow and brief.
This week the economic releases include ISM services, the Beige Book, ADP (150K), initial jobless claims, Challenger Gray & Christmas, and the Unemployment Report (170K). Initial jobless claims have been declining and I am expecting stable employment conditions. The current level is consistent with an economic recovery and most analysts believe we are coming out of a soft patch.
I am not looking for a gangbuster rally, but I do expect a strong bid. The SPY should be able to close above 153 this week. The economic news simply means that the backdrop is still intact. Conditions are stable, central banks are easing, credit concerns are low and stock valuations are attractive.
The sequester will help us curb deficit spending and if economic growth can offset its impact, it will demonstrate that we are one step closer to standing on our own 2 feet. The impact of federal spending cuts won’t be felt for a couple of months and I believe this rally still has some gas left in the tank.
The market tested the down side this morning and it feels like a quiet day. Asset Managers won’t take large positions until they see the economic releases this week. We should see some buying into the close and the market should finish unchanged. A good ISM services number tomorrow could spark a small round of buying.
I bought calls last week and I am adding today. My overnight risk exposure is small and I only have 20% of my normal position. I am day trading based on the one hour range of the SPY. I believe that will keep me on the buy side today.
Line up stocks that are in an uptrend and are on the verge of breaking through (or already have broken through) horizontal resistance on strong volume. You will have an opportunity to get long this week and the next move should last few days.
We can still expect choppy price action as the market gathers more information. Resistance at the all-time high will be strong and the market needs ammunition to break out. The closer we get to earnings season, the greater the probability of a breakout to new all-time highs.