Flash PMI’s Could Weigh On the Rally – Buy Dips. Any Surprise Favors the Upside.

September 19, 2012
Author: Peter Stolcers, Founder of OneOption
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Pete

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This week, the market has taken a rest after making a new five-year high. Central banks are printing money and traders won’t stand in the way. Asset Managers are hoping for a pullback, but they won’t get one. The bid to the market is strong and any pullback in next few weeks will represent a buying opportunity.

European banking officials are still forging a plan for a centralized bank. They hope to have approval by the end of the year, but this timeline seems aggressive. The rhetoric between member nations has been constructive. As long as traders believe that the ECB will do everything in its power to avoid a financial crisis, credit concerns will remain low.

Spain has not officially requested aid, and it might not until the October elections have passed. If it continues to wait, interest rates will creep higher. Yields should remain low for the next few weeks.

Germany’s Prime Minister wants to keep Greece in the EU and that is also bullish. She is trying to draft a plan to make that possible. Greece has missed budget targets and the situation is dire.

Economic conditions in China are deteriorating and I believe they are headed for a hard landing. Government spending and monetary easing will keep economic hopes alive for the next few months. When it is apparent that their economy is headed for a sustained decline, global markets will have a new worry.

The Fed said that they will keep their foot on the accelerator indefinitely. They want to see a decline in unemployment.

Politicians are scrambling to strike a deal. They want to postpone the fiscal cliff and Democrats might consider extending the Bush Tax Credits for 6 months. This outcome would spark the next leg of the rally if it happens.

Last quarter corporate revenue growth was meager and guidance was cautious. However, stocks are trading at an attractive forward P/E of 14 and balance sheets are extremely strong. With interest rates near historical lows, stocks are attractive.

Tomorrow, we will get a round of economic releases (flash PMIs, the Philly Fed and initial claims). These releases will remind traders that economic growth is fragile. We could see a small pullback, but the selling should be relatively contained.

Asset Managers don’t want to take profits, they want to add to positions. Speculators won’t short this market until technical support levels are breached. This means the market will grind higher.

Look for rotation. We are in “risk on” mode. Asset Managers will exchange safer stocks or riskier ones. Laggards will start to move higher.

The price action today is bullish and we should be able to grind higher. Bad news is expected from the flash PMI’s and weak results will be back stopped by central banks. Any surprise favors the upside.

Stick with the laggards and looks for breakouts above resistance on volume.
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