Late Day Selling Pattern Broken. Solid Earnings Will Push the Market Higher.

October 16, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market bounced off of critical support at SPY $143. That level has been tested twice and I believe the next rally will challenge the highs. During the last week, the market has been selling off late in the day. That pattern was broken yesterday and the S&P 500 is up seven points before the open today.

The financial sector led this 3-month rally and major banks have been able to hold those gains. Earnings have been better than expected and this morning, Goldman Sachs beat by a nice margin. European credit concerns have subsided, IPOs are on the rise and mortgage lending is improving. Financial stocks might need a little time to digest the news, but they look poised to rally.

The retail sector has been beaten down. Yesterday, retail sales (ex-autos) rose .9% and that was better than expected. Gasoline prices are starting to retreat and consumers are spending money. Yum Brands posted excellent results last week and Domino Pizza posted strong results this morning. Restaurant stocks are also moving higher.

PC manufacturers lowered guidance in recent weeks and tech stocks have been beaten down. After the close, Intel and IBM will post results. Intel’s numbers will be light, but worst case scenarios are priced in. IBM generates a substantial amount of revenues from service contracts and it is likely to post a good number. These two stocks will set the tone for the tech sector.

Ore producer Rio Tinto posted better-than-expected results. Conditions in China have stabilized. The PBOC has been easing and fiscal spending is on the rise. The government wants to make sure that the leadership transition goes smoothly. Investors will look past current conditions and they will expect economic expansion. This week China’s export number came in better-than-expected.

European stocks are trading higher overnight. Recent actions by Spain indicate that they will formally request a bailout in the next week or two. Interest rates in Spain and Greece are declining. Institutional investors are buying debt and they believe bailout payments will be granted. These are bullish events.

Economic conditions in the US are improving (ISM services/manufacturing, ADP, factory orders, Unemployment Report and retail sales). They are not any major economic releases this week.

The fiscal cliff looms. Politicians are on recess until the election and nothing will be solved. I don’t believe this will be a major issue for at least a couple of weeks. After that, it will weigh heavily on the market.

With all of the positive influences, the market should be able to rally. Revenues will be light, but cost-cutting will preserve profits. Companies are lean and mean and when activity rebounds, robust margins will produce fat profits. Valuations are attractive (forward P/E of 14), balance sheets are stronger than ever and the dividend yield on the S&P 500 is greater than the yield on 10-year US treasuries.

Asset Managers will rotate on a fixed income and into equities. I’ve been telling you to scale in. I will complete my positions this morning and I believe this rally will challenge the highs.

The Town Hall setting in tonight’s debate will make it hard for either candidate to gain the upper hand. The presidential race is very close and I believe next week’s debate will be more important.

Earnings will push the market higher. Stay long.
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