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Yesterday, the market rallied to a new five-year high. It felt good, but there was no substance behind it. After the initial surge, stocks traded in a tight range and the volume was light. The market wants to move higher, but it needs a catalyst.
PPI and building permits did not move the needle this morning. The FOMC minutes this afternoon will also be a non-event. Tomorrow the action will pick up. Initial jobless claims have been declining and that is a very bullish trend. The Philly Fed will give us insight on activity. If it is consistent with Empire Manufacturing last week, it will be bullish. US and European flash PMI’s will also be released.
Conditions in Europe are dismal, but they are improving. The EU PMI hit its highest level in 10 months during January. Their Q4 GDP came in light last week, but they could be coming out of a trough just as we are. The expectations are low and any surprise favors the upside.
China’s flash PMI will be released Sunday night. It is the global growth engine for the world and we need to see a strong number. They reported a soft retail sales number over the weekend, but I would not read too much into it. China’s growth has been steady the last few months and that trend should continue. The PBOC recently removed liquidity and it would not have done so if economic conditions were fragile.
Earnings season will focus on retailers starting tomorrow. Wal-Mart will post its results and the expectations are low after same-store sales were leaked last week.
This sector will be a “mixed bag”. Expectations for Q4 are low and results should be better than feared. The bigger issue is Q1. Payroll tax credits have ended and take-home pay has decreased. Gasoline prices are on the rise and they are at an all-time high for the month of February. This combination will crimp discretionary spending.
The sequester is a given at this stage. Republicans and Democrats are going to let the chips fall where they may. The market will shoulder the spending cuts as long as economic growth offsets the impact.
These offsetting forces could actually work in the market’s favor. If economic activity increases too quickly, traders will worry that the Fed will take the punch bowl away. The Fed has been buying 75% of all new debt issued by the Treasury the “Great Unwind” is a future concern.
A reduction in deficit spending would be long-term bullish for the market. Unfortunately, politicians can’t agree and they are using a machete when they should be using the scalpel.
Asset Managers won’t chase stocks without a reason. The market needs a catalyst if it is going to make a new all-time high.
The aftermath from the sequester needs to be evaluated and job growth needs to stay on track. If we are truly coming out of the economic trough, earnings will improve. The market will mark time at this level for the next few weeks and it will gather strength. Once it has the information it needs, it will challenge the all-time highs.
Stocks want to move higher. The volume will be light and the trading ranges should be relatively tight.
I believe the market will take a rest today. I would be surprised to see big back-to-back rallies on no news. Tomorrow’s releases should have a bullish bias and the market should be able to push higher.
Stay long and keep your size small. Focus on stocks that are breaking through horizontal resistance.
Know the last leg of this move has come on light volume and it is fragile. One bad news release could result in a swift pullback that lasts a day or two. Those dips will represent a buying opportunity.