Yesterday, the market was able to recover from Monday’s bloodbath. Once Ben Bernanke started to testify before the Senate, buyers stepped in. He will testify before the House today and that should provide a good backdrop. Stocks should grind higher and I believe we will rest at SPY 151 heading into the weekend.
The Fed Chairman said that they will continue QE well into the future. He also entertained the idea of keeping a huge balance sheet for a very long time. That means that the “great unwind” could be very gradual. He also said that the impact from the sequester will reduce economic growth by .6%.
Credit concerns in Europe subsided overnight. Italy had a decent bond auction and yields stabilize. As I mentioned yesterday, Italy’s election will be nothing more than speed bump few weeks from now. The EU is forming a centralized banking authority and the ECB is printing money like mad. From a macro perspective, these events are much more meaningful.
Retail earnings have been mixed. These stocks are already priced for disaster and the results are better than feared. Cautious guidance for Q1 is creating some selling pressure, but it is not disastrous.
We will get a dose of economic releases Thursday and Friday (initial jobless claims, Chicago PMI, China’s official PMI and ISM manufacturing). In general, these numbers should be stable and they will not spark selling.
Next week, ADP and the Unemployment Report will be critical. I believe job creation will be steady. The private sector has been strong and initial jobless claims (four-week moving average) are at 360,000. The recent trend is higher, but the level is satisfactory. There are many seasonal adjustments to sift through.
If the Dow had not tanked 300 points on Monday, I might have expected a little selling into the sequester. Now I believe government spending cuts are already factored in.
The market is searching for a catalyst. Monday’s pre-open rally was garbage. The news was negative and once the opening bell rang, sellers hit bids. The momentum was established early and Asset Managers backed off. Bullish speculators bailed out of positions and we hit an air pocket. Now that the dust has settled, buyers are supporting the market.
The macro backdrop is still good, but traders want to see economic growth. Without it, we won’t challenge the all-time high.
It will take a few weeks to gather information. If we are truly coming out of an economic trough, Asset Managers will aggressively buy stocks into April earnings season. If the economy sputters, the market could roll over. Federal spending cuts and the fiscal budget/debt ceiling could spook investors.
Until we have clarity, keep your size small. I am day trading after the market establishes a range during the first hour. If we are above it, I am trading strong stocks. If we are below it, I am shorting weak stocks.
I believe I will be trading from the long side today. Stocks should continue to recover into the weekend.