Yesterday, the market tested the downside after a weak round of economic releases (flash PMIs and initial claims). The selling abated early in the morning and stocks rebounded the rest of the day. This price action tells me that the bid is strong and Asset Managers are looking for opportunities to get in.
Based on recent actions, analysts believe that Spain will officially ask the EFSF for aid in the next few weeks. That news sparked a light round of buying in Europe. Spain held a successful bond auction this week and yields remain low.
Central banks have “thrown in the kitchen sink” in the last few weeks and we won’t get the next push higher from the Fed or the ECB. Earnings season is three weeks away and it might be the next catalyst.
Stock valuations are attractive (forward P/E of 14) and balance sheets are stronger than ever. With bond yields at historic lows, Asset Managers will look past recent warnings (FDX, NSC, Dell and HPQ). As long as European credit concerns remain low money will shift out of safer assets and into riskier ones.
One catalyst that could produce an instant spike exists. Politicians are negotiating the postponement of the fiscal cliff. Unfortunately, they are all on recess until the election. If the fiscal cliff gets pushed back six months, the market will rally into year end.
China’s economy continues to falter. The PBOC has been slow to react and they fear inflation. Central banks around the world have eased and that will put upward pressure on prices. If China does not react through fiscal spending or monetary easing, conditions will worsen quickly.
The economic calendar is very light next week. On Thursday, GDP, durable goods orders and initial claims will be released. I’m not expecting much of a market reaction to any of these. In two weeks, we will be trying to drink water from a fire hydrant. The economic releases include official PMI’s, ISM services/manufacturing, ADP, retail sales and the FOMC minutes. On October 3rd we will also have our first presidential debate.
The dust will barely settle from these economic releases and Q3 earnings season will begin (October 9th). Stocks have a tendency to rally into earnings season.
After a huge rally in the last three weeks, the market is due for a rest. There aren’t any catalysts to push stocks higher and I believe a tight trading range will set in. The economic releases will be a reminder that conditions are fragile and we could get a pull back to SPY $143. That support level should hold and it sets us up for a rally to new highs during the first two weeks of earnings season.
I am looking for sector rotation on a daily basis and I am day trading stocks. There is not much follow-through so I’m keeping my overnight exposure low.
Stocks are trying to push higher this morning, but the momentum has run out of steam. We could see a light round of profit-taking ahead of the weekend. Option expiration will produce a little choppiness in the last hour.
I suggest taking profits on your big winners. Place a GTC buy-stop order above the high price. This will get you back in if we get good news. You will be able to bank profits and you won’t have to worry about a negative news event.
Politicians are on recess until the elections and I am not expecting any news on the fiscal cliff front.
Reduce risk and wait for an opportunity to get back in. The next entry point is more likely to be a dip than a breakout.