The market has gradually been drifting lower since the FOMC statement. Traders are looking for the next catalyst and they won’t get one until earnings season. Major economic releases are a week away and they could spark profit-taking.
Credit concerns in Europe have stabilized. Spain will release its bank audit tomorrow and investors will be able to gauge the depth of the problem. Based on recent actions, Spain is preparing to ask the ECB for a bailout. They might wait a few more weeks until the elections, but when it happens the news will be positive for the market.
The situation in Greece is dire. They have missed budget targets by a wide margin and the bailout number keeps growing. Fortunately, Germany and France are in its corner and they should be able to get through this round.
The PBOC is not easing and they are concerned that recent actions by the ECB and the Fed will spark inflation. Economic conditions continue to deteriorate and S&P lowered its growth forecast for 2012. It now expects China’s GDP to grow 7.5%. I believe China is headed for a hard landing and that will become apparent in a few months.
China will release its official PMI next Monday, but the market will be closed for an entire week (holiday). If that number is light, selling pressure could build. Tension is running high with Japan and the two countries are disputing territorial rights over a small group of islands. This could result in economic sanctions.
Next week, major economic news will be released (official PMI’s, ISM Manufacturing/services, jobs reports and retail sales). We will also have statements from the ECB and the first presidential debate. I believe the news could weigh on the market. Consequently, I feel the best place to be is on the sidelines. If we get through this stretch without a pullback, the market will rally.
Earnings season is approaching and as long as credit concerns in Europe remain subdued, stocks will rally. The warnings have been fairly contained to PCs and transportation. Stock valuations are attractive and “risk on” mode will result in a rotation out of fixed income and into equities.
I suggest keeping your powder dry. I would rather buy a pullback than a breakout, but I’m prepared to do either. The news next week is important and anything we see today is simply noise. Wait until we have more information and then trade with confidence.
The market looks like it wants to head higher today. It was able to recover yesterday and the bid seems fairly strong. If you are nimble, day trade the rally and use tight stops.
I would not hold overnight. The news from Spain could be negative. Their banks are in bad shape and the bailout request might not come for a few more weeks.