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In the last week, the S&P 500 has trade in a 10 point range if you count intraday highs and lows. On a closing basis, it has had a five point range. We are in a news vacuum and that won’t change until the end of next week.
Monday is a legal holiday in the US and trading volumes will taper off throughout the day. The next big news event is the flash PMI’s on Thursday.
Industrial production was decent this morning and Empire Manufacturing was much better than expected (10). These are not typically market moving releases and they barely moved the needle.
Asset Managers want to buy dips so any decline will be brief and shallow. The problem is that we might not get any meaningful selloffs. With the market near all-time highs, they won’t pull their wallets out until they have confirmation that economic conditions are improving.
The market will consolidate recent gains and it will fall into a tight trading range. During this reprieve, it will gather strength.
The sequester is priced in. It will reduce GDP by 1% if economic conditions are stable. However, if we are coming out of a trough as most economists suspect, growth could absorb that hit. Deficit reduction is bullish for the market on a long-term basis.
As long as conditions continue to improve, earnings estimates for Q1 could move higher. As we get closer to earnings season in April, the market could have enough strength to make a new all-time high.
The potential catalysts could be better than expected growth in China, improving employment conditions in the US or a reduction in spending cuts. A budget that passes both the House and Senate would also be bullish and that would mean the debt ceiling would be extended.
It would be shocking if the White House passed its first budget in 3 years, but the market will give it a vote of confidence. If the budget is a joke and it can’t even get through the Senate, we might have our first speed bump.
Of course, the bullish forecast is always based on favorable credit conditions in Europe. If fear starts to spike, all bets are off.
Economic conditions in the EU are dismal and GDP declined more than expected. Fortunately, the agreement to form a centralized banking authority will help keep confidence alive. PIIGS bond auctions have gone well. As long as sovereign interest rates stay low, we are in good shape.
Look for tight ranges and a positive bias. The market needs time to gather strength and we need signs of global economic improvement in order to challenge the highs. Once the momentum is reestablished, the rally will continue.
Be patient. Conditions will improve next week.