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The market has rallied 5% in a little more than a week. Every ounce of news favored stocks. This surge higher will lead to a period of consolidation and we are likely to trade in a range this week.
The ECB plans to buy sovereign debt through the EFSF. Short-term yields in Spain and Italy have plunged. European banking officials are also drafting a plan for a centralized banking system. It appears that Europe’s largest banks will be regulated by the ECB.
Germany’s Prime Minister wants to keep Greece in the EU. She is drafting proposals and plans to make this possible.
The Fed eased last week and it plans to keep its foot on the accelerator until the unemployment level declines. This will continue indefinitely and the market likes the news.
All of these actions will have unintended consequences, but the market does not care. With regards to the ECB, lip service is one thing, execution is another. Many obstacles lie ahead.
China’s economic conditions are weak and the PBOC has been slow to react. Their market was down 2% overnight. I believe they are headed for a hard landing, but easing and fiscal spending will slow the decline.
Asset Managers do not want to miss a year-end rally. They will aggressively buying dips and that means any decline will be shallow and short-lived. When European credit concerns subside, the market stages a sustained rally.
The economic news is fairly light this week. Empire Manufacturing came in softer than expected (-10) this morning. The market should be able to weather economic releases for at least a few weeks.
After a big run and a breakout to new 5-year highs, stocks will take a breather. We will see rotation out of safe stocks (consumer staples, utilities and dividend plays) and into riskier assets (cyclicals, commodities and retail). Look for laggards that are starting to move higher off of a base. Strong volumes are also a sign that money is flowing into the stock.
I suggest using trailing stops on big winners. We are likely to see profit-taking in these names. The exception is energy. I still believe the sector has room to run,
The overall market will be flat this week, but there will be action within. Try to identify sectors and groups are gaining traction. The downside will be relatively contained and we might see a small pop or two to the upside.