Last week, the market poked through resistance and it made a five-year high. Apart from China’s better-than-expected trade balance, there wasn’t much news. The market needs a catalyst to sustain this rally.
Component suppliers for Apple said that orders have declined 50%. The stock is down $15 and it is weighing on the market.
Investors are nervous ahead of earnings season and major banks will start releasing Wednesday. On Friday, Wells Fargo beat on the top and bottom. The reaction was muted and the stock pulled back slightly on the news.
Financial stocks will have many write-downs (i.e. mortgage settlement) and there will be plenty of “noise”. When the dust settles, the news will be generally positive. This sector will play an important role in any future market rally.
Analysts are expecting Q4 earnings on the S&P 500 to be 3% lower than Q3 earnings. Those numbers are usually flipped and this represents a 6% swing. Asset Managers will be uneasy during the first week of releases, but eventually they will warm up to strong balance sheets and solid cash flow. Relative to bonds, stocks are attractively valued.
Economic releases have been stable. Strength in China is offsetting weakness in Europe. US activity is sluggish and analysts are getting used to the “new normal”.
Credit concerns in Europe have subsided. The EU agreed to a centralized banking authority and PIIGS auctions have gone well recently. This dark cloud has temporarily parted.
Given the backdrop, money will gradually rotate into equities. Unfortunately, it won’t be because of growth. Stocks are attractive on a relative basis and there simply aren’t many investment alternatives.
The market will discount the debt ceiling just as it did the fiscal cliff. Politicians will drag their feet and the rhetoric will get ugly. Investors will get nervous and the market will decline in the final moments. This pullback won’t happen for a few weeks. Once support is established it will present an excellent buying opportunity.
I believe stocks will chop around during the next week and they might pullback slightly. Asset Managers will passively buy stocks and the bid will return in 2 weeks. The market might establish a new relative high. In February, debt ceiling concerns will result in a swift decline. At worst, we will fill in the gap and the SPY will find support at $143 (100-day moving average).
If we get a decent pullback during the next week, I will wait for support and I might take some bullish overnight positions. Companies need to meet expectations and the guidance needs to be fair. I will set targets and I will reduce risk in February. I want to keep my powder dry for the debt ceiling decline.
Given the timeline, I will have all of the earnings information I need. I will be able to gauge revenue/profit growth and the guidance. If everything looks stable and the debt ceiling gets extended, will have a nice rally.
The rhetoric out of DC was a little ugly this weekend and it will keep a lid on the market. Apple will also weigh on the market. Look for a quiet day with a negative bias.
I am still day trading. If the SPY trades below $146.50, I will take a few bearish day trades. If not, I will stay on the sidelines.
Keep your size small and use stops.