Domestic Activity Sparks A Rally. Overnight News More Important. Wait For A Breakout

Yesterday, stocks gave back some of last week's gains. The selling pressure was very light ahead of major economic releases. Overnight, China posted its official PMI. It was a little below estimates, but that did not spark selling. They will release manufacturing and nonmanufacturing data over the next three days and traders will be looking for signs of strength. The PMI's in Europe will be released tomorrow due to a holiday (May Day). Weak results are expected. Stocks were flat on the open and they spiked after ISM manufacturing and construction spending both exceeded estimates. ISM manufacturing came in at 54.8. That was better than the 53.0 that was expected. Empire Manufacturing, the Philly Fed and Chicago PMI were flat in recent weeks and the expectations for this number were relatively low. Construction spending increased .1% after declining 1.4% in February. I mentioned yesterday that the focus this week would shift from earnings to economic activity. Growth in China has to offset weakness in Europe if the market is going to challenge the highs from March. Domestic releases were expected to be flat and we got an upside surprise this morning. Tomorrow's ADP report will be critical. It has been a reliable barometer for the Unemployment Report until last month. In fact, this year the market has made bigger moves off of the ADP report than it has off of the Unemployment Report. Last month, ADP showed that 210,000 jobs were created in the private sector. This was much higher than the government's number (110,000). Either ADP will be revised downward tomorrow or the Unemployment Report will be revised upward on Friday. Initial jobless claims spiked before Easter and they have not retracted. This is a little concerning. I believe ADP will come down and Friday’s number will come up a little, but miss estimates. The 175,000 estimate seems a bit high. The market clearly wants to move higher. European credit concerns should be contained now that the IMF has $1 trillion in its coffers. Spain will hold a bond auction on Thursday and it should go fairly well. India lowered interest rates 50 basis points two weeks ago for the first time in four years. Today, Australia lowered its interest rates by 50 basis points (25 points expected). Analysts are expecting the PBOC to lower bank reserve requirements in the very near future. Central banks are easing and that is favorable for equities. Last week, the Fed did not suggest that QE3 was a current consideration. The market is addicted to "easy money" and it did not sell off on the FOMC statement. This is a sign of strength. Earnings have been strong and guidance is solid. More than half of the S&P 500 has reported and profits are up 10% year-over-year. The SPY broke the $139.60 level yesterday and I shorted a handful of stocks. I was able to cover and make a little money. I missed the initial rally after the ISM manufacturing number this morning, but I bought stocks after the initial surge and I have nice profits. I will sell the positions before the close. The market is very choppy and I am day trading stocks at the top of the Live Update table. I am not carrying overnight positions because I want to limit my risk. This strategy has allowed me to make money in a sideways market. Once we breakout/breakdown, I will place directional bets. At this juncture, my bias is neutral to slightly bullish. My core positions are in great shape. I have been selling out of the money put credit spreads the last few weeks and I have been focusing on cyclical stocks. Today's rally feels nice and it is exciting to be within striking distance of multi-year highs. The momentum is strong and this move should inch higher the rest of the day. Temper your bullishness. The news today was good, but not great. ISM manufacturing nudged higher and construction spending barely made it into positive territory. Tomorrow's ADP report and the overnight news from China/Europe will carry much more weight. Thursday's initial claims number and ISM services will also be important. A decent round of domestic economic news this week would tip the scales in favor of the bulls and we could break out to a new high. The market should grind higher today. Limit your overnight exposure. If we breakout to a new high this week, you can get more aggressive. The "sell in May" crowd is getting squeezed today.

Daily Bulletin Continues...