What a wild week. The market was filled with noise and we successfully navigated these stormy seas. Time is the key component and Asset Managers need evidence that the economic soft patch is behind us.
The news over the weekend was negative and I referenced that Monday morning. Once the early rally failed, the selling momentum picked up. Asset Managers pulled their bids and bullish speculators bailed. That move was complete garbage and I told you Tuesday morning that Italian elections, the “great unwind” and sequestration would be speed bumps.
Italian elections did not go as planned, but the political disarray will not unravel all that has been accomplished in the last six months. The EU will establish a centralized banking authority and the ECB will do everything in its power (print money) to avoid a financial crisis. In a few weeks, Italy will be off the radar.
Ben Bernanke testified before Congress this week and his comments were very dovish. The Fed will continue quantitative easing for a long time to come. When they do stop easing, they plan to carry a huge balance sheet until a sustained economic recovery is underway.
The sequestration will weigh on GDP, but a reduction in deficit spending is bullish for the market on a longer-term basis. Economic growth will offset the impact of federal spending cuts and will be in a Goldilocks environment (not too hot, not too cold). The Fed will remain accommodative and economic growth will be gradual.
Asset Managers will not chase stocks when they are near all-time highs. They want concrete evidence that we are coming out of a trough. Durable goods orders were better than expected and the housing numbers were decent. Initial jobless claims declined by 22,000 and that bodes well for next week’s jobs reports. GDP was revised upward and it is in positive territory (.1%). Chicago PMI rose to an 11 month high and that should be good for ISM manufacturing tomorrow.
Growth in China hit a small speed bump, but it is not a major concern. The PBOC has been removing liquidity and they would not do so if economic conditions were deteriorating. Analysts still expect their GDP to grow 8% this year.
European credit concerns will remain low and central banks around the world are printing money like mad. Growth in China will offset weakness in Europe. Domestic employment is improving and corporations are making good money. At a forward P/E of 14, stocks are attractive relative to bonds. These macro influences are bullish.
The market simply needs time. If current economic trends continue, stocks will rally into April earnings season.
ISM services, ADP and the Unemployment Report should push stocks above SPY 153 next week (Monday’s high). The market will chop around after that and the bid will strengthen towards the end of March.
Look for stocks that are in an uptrend and have rallied through horizontal resistance on strong volume. These breakouts tend produce sustained moves. Once the momentum stalls, take profits and look for the next play.
There will be selloffs, but they will be brief and shallow.