The market was all over the board this week with huge moves in both directions. When prices get ahead of themselves we can expect selling. When stocks decline to a support level we can expect buying. After a 7% rally this year, the market needs to consolidate gains. It will not move higher until and economic recovery is apparent.
This week GDP improved and it inched into positive territory. Chicago PMI hit its highest level in 11 months and initial jobless claims declined 22,000. ISM manufacturing was better than expected this morning and all of the housing statistics have been good this week.
The economic news will crank up next week. ISM services will be released on Tuesday, ADP will be released on Wednesday (155K), initial claims and Challenger Gray & Christmas will be released Thursday and the Unemployment Report (151K) will be released next Friday. After that, China will post industrial production, CPI and retail sales. This combination of data points will determine if the market can move higher.
Economic conditions need to improve gradually. If growth can offset the impact of federal spending cuts, it will be the first time in years that the “training wheels” have been taken off. Deficit spending is out of control and we are simply trying to slow the rate of acceleration.
The “Bernanke put” is in place. This week it became a LEAP option. The Fed will continue QE for a long time. Furthermore, it plans to carry a huge balance sheet for many years. This means traders don’t need to worry about the “great unwind”.
Central banks around the world are printing money like mad. As long as global economic growth is stable and interest rates remain low, the market will move higher.
We have a very busy week ahead of us and we will see how all of this plays out. Keep your size small until we have clarity.
I still believe this market rally has some gas left in the tank.
The market found support early this morning and it is grinding its way back. I bought a few calls and I will add positions on continued strength today. I will add to positions on weakness next week.
This next round of news is exactly what the market needs to challenge the all-time.