The market already feels like it has fallen into holiday trading mode. It wants to move higher, but natural sellers looking to reduce risk into year-end are keeping the move in check. There is minor resistance at SPY $144.
The news last week was good. China’s retail sales, industrial production and exports were better than expected. Friday’s flash PMI was also better-than-expected and their stock market is up 11% in the last two weeks. China’s new leaders will increase fiscal spending and the PBOC will ease.
Europe’s flash PMI also improved, however activity was still dismal. Germany’s central bank is forecasting a recession next quarter and most of the EU is already in one. European officials agreed to a central banking regulator and that was a major accomplishment. Greece secured its bailout payment and credit concerns should remain subdued for a few months.
Domestic economic releases were also positive. The jobs reports, initial claims, ISM services, the PPI and retail sales came in better-than-expected. Empire manufacturing was soft this morning. This week we will get the Philly Fed, initial claims, Q3 GDP and durable goods. I’m not expecting these releases to move the needle.
The Speaker of the House and President Obama are keeping the lines of communication open. Boehner offered $1T in tax revenues and under this plan the debt ceiling would be raised for another year. This would increase taxes for Americans making more than $1 million a year. If it were accepted, this would be a “grand bargain” for the market.
Wealthy Americans can shoulder the tax increase and it would not impact the economy. Most Americans (98%) would continue to enjoy the Bush tax credits. The fiscal cliff could be avoided for a year because Democrats would push back spending cuts. They would not have to worry about the debt ceiling. If this had passed, the market would have made new highs. This proposal would have kicked the can down the road for another year.
I’m not saying that this solution is what’s best for the country. I am simply stating that it would be “market friendly”.
President Obama said that more tax revenues are needed. If the Republicans are going to concede (let the Bush tax credits expire for Americans making more than $250,000 a year) they will not extend the debt ceiling. This is their bargaining chip and it is their chance to cut spending and reform entitlement.
Time is running out. If we don’t get a deal this week, the market will retreat. Politicians will get their act together and they will agree to a mini deal. Stocks should rally into year-end, but I doubt that we get much above current levels. The debt ceiling will weigh on the market and Asset Managers will sell stocks to reduce risk.
The rhetoric could get nasty even after a mini deal. Neither side will get what they want. The battle lines will be drawn. The last time we went through debt ceiling negotiations, we lost our credit rating.
Earnings releases could impact trading this week. Oracle announces on Tuesday, FedEx announces on Wednesday and Nike announces on Thursday. This is an excellent cross-section and it will give us a read on tech, transportation and retail. I am expecting cautious guidance and I believe the results will have a negative bias.
There is no reason to stick your neck out in this light volume trading environment. I believe the SPY will trade in a range between $142 and $144 this week.
I am day trading stocks. Use the one hour range as an indicator. If the market is trading above the one hour range favor the long side. If the market falls back into the one hour range, exit long positions. If the market trades below the one hour range, short stocks. I’m using The Daily Report Live Update Table for my candidates and I’m focusing on the stocks at the top of the watch list. This strategy continues to work well.
The tone is generally positive today and stocks should be able to finish on the plus side. Keep your overnight exposure to a minimum.
Towards the end of the week we might see a pullback. No agreement in DC and dismal earnings guidance will spark a light round of selling.