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There aren’t any roadblocks and there aren’t any catalysts. The market wants to move higher, but traders need a reason to buy.
Major economic releases were posted two weeks ago and earnings season is winding down. China’s market was closed this week to celebrate the New Year and the US market will be closed Monday. Consequently, trading volumes will be light and the daily range will be tight.
Europe’s GDP was soft and that is weighing on the market this morning. This is not a big surprise and stocks should be able to recover this afternoon. Initial jobless claims fell 27,000 and that was better than expected. Earnings from Cisco and Applied Materials were decent and the Heinz takeover should provide a positive backdrop today.
The next material economic release will hit next Thursday. Flash PMI’s will give us a peek at February activity levels. Most economists feel that conditions are gradually improving and they will be looking for signs of a trough.
The State of the Union address was highly publicized and it did not provide any surprises. Republicans seem willing to let the sequester take its original course. They don’t believe Democrats will swap defense spending cuts for other programs. Many analysts believe that this will reduce GDP by 1%.
The initial reaction could be slightly negative. However, a reduction in deficit spending would be good on a longer-term basis. If the economy is improving, this 1% hit to GDP will quickly be absorbed.
European credit concerns are low, economic activity in China is strong, employment in the US is improving, corporate profits are at record levels and central banks are printing money. These are all positive influences.
Asset Managers are waiting for a pullback so that they can buy the dip. Last week, they pulled their bids so that they could gauge selling pressure. When they did not see profit taking, they replenished their bids and the market recovered instantly. This price action tells me that we won’t see a meaningful decline.
By the same token, Asset Managers are not going to chase. The market is within striking distance of an all-time high and they need a reason to get more aggressive at this level.
The market will consolidate recent gains and it will gather strength for a few weeks. I don’t believe we will see any major moves in either direction. The price action will be choppy with an upward bias.
Look for sector rotation within the market. I like stocks that are breaking through horizontal resistance on strong volume. Ride the momentum until it stalls and get out.
Keep your size small for the next week and be ready for action when global markets reopen.