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The market has been consolidating after a 5% whipsaw during the last two weeks. It is waiting for information that could push it in either direction.
Alcoa kicked off earnings season and the results were decent. It still cites long-term demand growth for aluminum and it has trimmed expenses. This should be typical of Q4 earnings. Topline growth will be flat and cost-cutting will preserve profits. The results won’t excite anyone and the guidance will be cautious.
Bond yields are at historic lows and Asset Managers want to rotate into equities. Even without topline growth and clarity, stocks are attractively valued. Corporate balance sheets are strong and companies are lean and mean.
European credit concerns are subdued. This was a dark cloud from 2012 and it has temporarily parted. The EU agreed to a centralized banking authority and that should pacify investors for the first half of the year.
Economic growth in China is projected to be 7.5% this year. As long as conditions are stable, Asset Managers will remain hopeful. Europe is in recession and it will be a global drag on activity.
Domestic economic releases have been decent, but that could change if our government dramatically cuts spending. The debt ceiling is the last dark cloud. We are bumping up against it and the U.S. Treasury can avoid default through February.
The rhetoric between both parties will turn nasty. Republicans are struggling to regain their footing after the elections and they have a weak hand. Their representation in the House and the Senate will decrease as more Democrats than Republicans take office. The party itself is divided and Tea Party conservatives are not seeing eye-to-eye with GOP moderates. During his inauguration speech, Obama will blast Republicans if they threaten default.
If you are new to my research, you might feel like I am making a political statement – I am not. My job as a trader is to evaluate information and to weight possible outcomes. The probability of each scenario is factored into my market forecast.
I told you earlier this week that the market would discount the debt ceiling just like it did the fiscal cliff. It would be inconceivable for our country to default and traders won’t worry about it until the last minute.
The rhetoric will be ugly and it will come down to the wire. Eventually, Republicans will cave-in and the “can” will get kicked down the road. Overnight, Speaker of the House Boehner admitted that the debt ceiling was a blank threat. Once it is extended, the market will rejoice.
The strongest companies release early in the earnings cycle and the market will try to push higher next week. It might break through resistance, but the move will be tenuous. Asset Managers still want to see the extent spending cuts and they want to evaluate the negotiation process. If it turns ugly, Fitch already warned that a credit downgrade is possible. We are likely to see a pullback during the final stages of the deal and that will present an excellent buying opportunity.
The market wants to push higher today. I still believe the rally will be relatively contained and there is some nervousness ahead of earnings season. The actual numbers will be better than feared and the market will be able to grind higher.
I still like day trading and keeping my overnight exposure to a minimum. If the market is above its one-hour range I’m trading from the long side and if the market is below the one hour low I am shorting stocks.
I sense that the next move is higher, but I don’t want to stick my neck out. I will wait to buy a dip and if I don’t get one I will keep day trading.
I still believe there will be a sharp pullback before the debt ceiling is extended and that is where I will aggressively take longer-term bullish positions.
Try to keep your powder dry. Trading volumes will increase next week and excellent opportunities are close at hand.