Profit Taking In Europe. News Not Material – Won’t Spoil This Rally. Stay Bullish – Buy Dips

February 4, 2013

Last week the market surged to new five-year highs. Global economic activity is improving and most analysts believe that we are coming out of an earnings trough. Investors are willing to discount current releases on the notion that conditions are about to improve.

European credit concerns have subsided. This morning, stocks are down on political news in Italy and Spain. Without getting into the details, I believe the events are not material. European markets have rallied and investors are looking for a reason to take profits. That weakness is weighing on our market.

Europe’s economic conditions are weak, but the PMI hit a 10-month high last week. Without question, it is the weakest link in the chain and credit concerns can flare up at any time. The EU agreed to a centralized banking authority and the ECB is printing money like mad. PIIGS bond auctions have gone extremely well and I don’t believe today’s selling is anything more than a little profit taking.

China is back on track and recent economic releases have been strong (PMI, retail sales, GDP and industrial production). Many analysts have raised their expectations and they are expecting growth to exceed 8% this year.

Domestic economic releases have also been improving. Q4 GDP was -.1%, but the rest of the numbers have been good. As I said earlier, analysts are discounting current news and they believe activity is improving. In January, 157,000 new jobs were created. The private sector is strong and ADP reported that 193K new jobs were created in January. Challenger Gray & Christmas said that planned layoffs are down 25% year-over-year.

ISM manufacturing came in at 53.1 and that was much better than expected last Friday. ISM services will be released tomorrow and the consensus estimate is 55. This number should spark a round of buying. The economic news will be light the rest of the week.

Most of the major earnings have been released and there shouldn’t be too many surprises. Analysts have a sampling from all sectors and groups. Revenues are flat and profit margins have been maintained through cost-cutting. Asset Managers want to buy dips and today’s decline represents a buying opportunity.

The sequestration is a month away and I believe the market still has some gas in the tank. Any positive news on this front will act as a catalyst. Credit concerns are low and so are bond yields. Money will continue to flow out of bonds and into stocks.

Buyers have put their wallets back in their pockets today. This decline is nothing more than an absence of buying. I don’t believe we are seeing a lot of profit taking. Asset Managers will evaluate the price action and they will hold off until they see the bid return. Once they see support, they will rush in and scoop stocks.

I believe the price action will be soft early today and it will firm up in the afternoon. As the week progresses, the bid will strengthen.

I am long calls and I am actively trading. I like stocks that have consolidated and are breaking out through horizontal resistance. Those moves tend to last a few days and I am setting target profits. When the move has exhausted itself, I’m out and onto the next play.

The market might not move much, but there is a lot of action within. Look for stocks that released strong earnings and are starting to break out. Take profits along the way and know that the next 50 S&P 500 points will be hard-fought. That is the all-time high and we can expect choppy price action.

Positive rhetoric from DC and progress on spending cuts would help the market challenge the highs.

Stay bullish and buy dips. They will be brief and shallow for the next few weeks.
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