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Asset Managers don’t want to chase stocks and bears don’t want to short the market near multi-year highs. When the market pulls back slightly, investors nibble. When the market rallies, profit taking sets in. We are in a holding pattern and we need a catalyst to break out of the range.
Earnings season kicks off today and I believe the results will be better than feared. Valuation (not profits) will be the next driver. Stocks are trading at a forward P/E of 14 and balance sheets have never been stronger. Asset Managers know that companies are lean and mean. When revenues eventually tick higher, money will flow right down to the bottom line.
Central banks around the world are easing. That puts downward pressure on interest rates and bond yields are at historic lows. European credit concerns have subsided and equities are the best deal in town. Money will rotate out of fixed income and into equities.
Corporate revenues will be light and guidance will be cautious. During the next week or two, investors will be a little nervous. Earnings warnings have kept a lid on this market. Bad news is priced in (especially in the tech sector) and as earnings season unfolds, buyers will get more comfortable with the backdrop.
Economic conditions in the US are stable and they might be improving slightly. Last week’s releases (ISM manufacturing/services, ADP, factory orders and the Unemployment Report) were better than expected.
Spain will ask for a bailout and Greece will get its next payment. Both of these events are bullish and they will play out in the next week or two.
The PBOC just provided a huge liquidity injection and we can expect further easing during the upcoming leadership change. China will also initiate fiscal spending programs. This news will also restore confidence into year end.
We are in “risk on” mode. Asset Managers are fearful that they could miss a year-end rally. When the dip that they are all waiting for fails to materialize, they will get nervous. The bid will grow with each passing day and the market will grind higher.
The strongest companies announce early in the earnings cycle and I believe we are a week away from constructive price action. Take advantage of this opportunity and scale into stocks that are breaking through resistance. Know that you are early and you might have to take a little heat on the positions. Once this rally starts, the momentum will accelerate quickly.
Stocks opened higher this morning. A pattern has been established the last two weeks and stocks have been selling off in the last hour. When this pattern is broken, the next leg of the rally will start.
I believe Alcoa’s number will be light. The stock is near the low end of its trading range and I don’t believe we will see much downside. The company has been progressively cutting expenses and that should help the bottom line.
You still have time scale into positions. Line up your stocks and look for entry points. The bid will strengthen over the next two weeks.