Yesterday, the market rallied when China’s PMI came out better than feared. ISM manufacturing added fuel to the fire when it beat estimates by a fairly wide margin. The S&P 500 rallied 15 points early in the day. The gains gradually evaporated and the market barely finished in positive territory. That price action indicates selling pressure.
There will be many major economic releases this week. Tomorrow, ADP employment and ISM services will be released. ADP has been coming in above estimates the last few months. Initial jobless claims have been stable the last few weeks and I believe private sector job growth will be decent. ISM manufacturing came in better than expected Monday and last month, ISM services spiked. Consequently, I believe the growth in the service sector will also be good.
European credit concerns are low. Many analysts believe Spain will formally request a bailout. That news could come as early as next week and it would be bullish for the market. Greece is in the final stages of negotiating its bailout. Germany and France wanted to remain in the EU and a deal would be good for the market.
China’s market is closed all week for holiday. There is still some uncertainty about the new leader. However, most analysts believe that once a decision has been made, China will come out with both guns drawn. Fiscal spending and monetary easing will provide a strong tail wind for the new leader. This would be bullish for global markets.
I’m not expecting any progress on the fiscal cliff. Both parties want to postpone it, but they are miles apart. They know that these spending cuts would send us into a recession. Congress is in recess until the election and it will be tough to strike a deal in the next few weeks.
Earnings season is right around the corner and it should provide the next catalyst. Analysts are worried about top line growth, but it won’t matter. Corporations are lean and mean in any uptick in revenues will go straight to the bottom line. Stocks are attractively valued at a forward P/E of 14 and balance sheets have never been stronger. With bond yields at historic lows, Asset Managers will rotate out of fixed income and into equities. European credit concerns will remain low and the market will stay in “risk on” mode.
A few months ago, we would take bullish positions and constantly look over our shoulders. One bad news event in Europe would send stocks lower. We are not currently fighting that uncertainty. Central banks are easing and the market will be able to look past a handful of earnings warnings and/or a weak economic release.
It might take a few weeks for Asset Managers to warm up. They don’t want to chase stocks and they don’t want to miss a year-end rally. When they see that a pullback is unlikely, they will get more aggressive.
Yesterday’s news did not justify a massive rally. I’m not surprised that the gains evaporated. This morning’s rally has reversed as well and we will test the downside. Stocks should find support late in the day.
I have been advising you to line up your longs. I believe the economic releases tomorrow will be good and I suggest taking a few bullish positions today.
I am focusing on domestic companies that generate most of their revenues in the US. Look for stocks that are in an uptrend and have consolidated in a tight range. The best longs will be breaking through horizontal resistance on heavy volume.
We are still likely to see a little choppiness. Look for opportunities to scale in.