Solid PMIs and A Good Jobs Report Will Attract Buyers Friday. Stay Long.

January 31, 2013

The market still looks strong and we should expect consolidation near the all-time. Asset Managers are waiting to buy a pullback and that means that declines will be shallow and brief. The S&P 500 will chop around and gather strength so that it can assault the highs.

Yesterday, Q4 GDP fell into negative territory (-.1%) and that was much worse than expected. Many analysts believe that this is an economic soft patch and they shrugged off the miss. The FOMC statement was benign, but traders are nervous about the “great unwind”. The Fed will have to sell some of its massive bond inventory later this year.

Interest rates are at historic lows and we have a long way to go for they become problematic. Investors are selling bonds and they are buying stocks. Consequently, 10-year US Treasury yields poked above 2% this week. Higher interest rates will not be a problem if they are accompanied by economic growth and low inflation.

Initial jobless claims were a little higher than expected today, but the four-week moving average is trending lower. Yesterday, ADP reported that 192,000 jobs were created in the private sector during January. This morning, Challenger Gray & Christmas said that planned layoffs declined by 25% year-over-year. These are encouraging signs and they bode well tomorrow’s Unemployment Report.

We are in “risk on” mode. European credit concerns have subsided, PIIGS bond auctions have gone well, US bank balance sheets are strong and credit spreads are contracting. Option implied volatilities are near historic lows and confidence is running high.

The sequestration deadline is a month away and it does not pose an immediate threat. The debt ceiling has been pushed back and investors are breathing a little easier.

Earnings have been decent. Revenues are flat and profits have been preserved through cost cutting. Any uptick in revenues will go right to the bottom line. Balance sheets and cash flows are strong. Relative to bonds, stocks are attractively valued and we will continue to see money flowing out of fixed income and into equities.

The market will probe for support today. Tonight, official PMIs will be released and they will be consistent with the flash reports last week. Europe will look like it is bottoming and growth in China will be back on track. The market will like the numbers and that will set a positive tone for the jobs report.

The market bid should firm up tomorrow. Asset Managers have been waiting for a dip and I doubt they will get one. Those who are under-allocated will aggressively bid for stocks. Shorts will not stand in the way of this freight train and the selling pressure will be light.

Look for the bid to return. Buy stocks that are in a longer term uptrend and have broken through horizontal resistance. These moves tend to follow through for at least a few days.

The market might not move much, but there is plenty of action within. Look for sectors/groups that are strong relative to the market and take advantage of asset rotation.

If you have nice profits in your call positions and the stock stalls, take profits and move on. We should see a steady grind higher for a couple of weeks and there will be plenty of rotation.

Stay long.
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