The market has settled into a very quiet trading pattern and I don’t see that changing this week. Volumes have declined to their lowest levels since 2007. This indicates a low-level of conviction and risk is elevated.
The news front is benign this week. Q2 GDP will be released on Wednesday and it should not have a major market impact.
The GOP convention will start today and fortunately the tropical storm has moved west of Tampa. Republicans will craft their message and ratings should improve. That will provide a positive backdrop for the market.
Towards the end of the week central bankers will meet in Jackson Hole. Traders hope that the timeline for QE3 will move forward. I don’t believe Ben Bernanke will add anything new. The ECB President will also reiterate his plan to support short-term sovereign interest rates and to establish a centralized European banking system. The details will be sketchy, but the danger of a major announcement will keep short-sellers at bay.
Stocks should be able to drift higher this week. Valuations are attractive and balance sheets are strong. There isn’t any news to stand in the way of this rally and stocks tend to move higher ahead of major holidays.
Over the weekend, Apple won its patent case against Samsung. This was a major victory for the company and the stock jumped higher. This will put pressure on Android cell phone makers.
After this week, the action will pick up. Central banks will release their statements and major economic releases (ISM manufacturing, ISM services, PMIs, ADP employment and the Unemployment Report) are scheduled. The volatility will increase and trading volumes will improve.
The market is just below multi-year highs. Ironically, China’s market is making multi-year lows. This divergence between the world’s largest economies will add to uncertainty.
Last week, one of Brazil’s largest iron ore producers said that China’s growth boom is over. Australia’s Resource Minister chimed in with a similar statement. Both sources have their finger on the pulse and if it is true, we will have more to worry about than European credit markets. China has been the growth engine for the entire world and a recession would impact global economies. The PBOC will ease, but investors will wonder if their actions can prevent further contraction.
The rhetoric between Germany and Greece is also heating up. Many officials want to cut off aid and they are already talking about an EU without Greece. They are behind on spending cuts and tax receipts are down. That means they will miss deficit targets by a large margin.
The US and Japan both face fiscal cliffs. Reduced spending will weigh on GDP growth.
The macro events I have outlined will take a few weeks to play out. September is traditionally one of the weakest months of the year and we are due for a pullback.
Trade the rally this week, but maintain very tight stops. Also limit your overnight exposure. Bullish speculators will be lured in as stocks try to make a four-year high.
Focus on stocks that have moved higher and have consolidated in a tight range. Once they break through to a new relative high, take a position. These patterns tend to produce sustained rallies. You won’t have much of a tail wind (market momentum) so set profit targets and don’t get greedy.
Trading activity will return to normal in a couple of weeks and there will be many opportunities this fall.
Stocks should be able to move higher this week.