Cyclical Stocks Are Catching A Bid. Use Caution Ahead of AAPL and the FOMC.
Yesterday, the market declined on European headlines. The SPY broke support at $138 for the third time this month. Asset Managers are not worried that they will miss the next rally and we are seeing some profit-taking.
As I mentioned in yesterday’s comments, the news was not that damaging. The Dutch Prime Minister resigned because austerity measures were not approved. We’ve seen this in Portugal, Italy and Greece. Moody’s did not downgrade their AAA credit rating. Sarkozy lost the first round of French elections to Socialist Hollande. The polls were already suggesting this defeat weeks ago.
The biggest news came from Germany when its flash PMI dropped more than expected. It has been the cornerstone for economic stability in Europe and this is not a healthy omen.
The IMF doubled its war chest over the weekend. It now has more than $1 trillion in its coffers. That should pacify European credit concerns for at least a couple of months. Bond auctions in Spain and Italy went well overnight.
Industrials are rallying today. Parker Hannifin, Ingersoll-Rand, 3M and Illinois Tool Works all posted solid results. These stocks have not rallied with the market and they have room to run. The market needs these stocks if it is going to move higher.
Since January, the rally has been narrow. Apple accounts for 10% of the S&P 500 gains. It will release after the close and the stock looks weak from a technical perspective. If it tanks, it will impact the S&P 500.
Financials have rallied 24% this year and they also look tired. Bank stocks that have posted results are trading lower after the news.
Economic conditions in Europe are weak, they are stable in the US and they are improving in China. The PBOC has hinted that it will lower bank reserve requirements.
Tomorrow, the Fed will release its statement. Given the recent misses (economic releases), their rhetoric should be dovish. Ben Bernanke will deliver a speech afterwards and that could be a market driver. Traders will be looking for QE3 and I don’t think the Fed is ready to take action. This could weigh on the market.
Initial jobless claims will be released Thursday. Applications normally rise after a holiday and they stayed elevated last week. Traders were willing to give the distortion another week to correct, but a bad number on Thursday would spark selling.
Q1 GDP will be released on Friday. Analysts are expecting a meager 2.2% growth rate and some believe we could hit 2.5%. This is not a bad number, but it is not great either.
European credit concerns are the wild card. The IMF’s new funding should keep a lid on fear, but anything can happen. Declining economic activity in Europe should be offset by growth in China. Earnings releases have been decent and industrials are catching a bid.
I have been selling out of the money put credit spreads on cyclical stocks. This allows me to distance myself from the action. I have also been day trading stocks to reduce overnight risk exposure. I bought cyclicals this morning and I have already taken nice profits.
Apple’s earnings tonight and the FOMC tomorrow have me a little concerned. With the market below SPY $138, I remain cautious. The market has not been able to rally during the first two weeks of earnings season and that is also a red flag.
Towards the end of the week, energy stocks will start releasing. I believe oil producers have room to run.
I suggest seeing how the next day plays out before taking new positions. We will have better clarity after Wednesday. The market will be choppy, but there will be opportunities within as money rotates in and out of various groups.