Early Weakness and A Grind Higher. Solid Earnings Should Push Stocks Higher Into the Weekend
Yesterday, stocks gave back some of Tuesday’s big gains. Traders pulled bids ahead of Spain’s longer-term bond auction. The pullback was minor and it was due to a lack of buying.
Spain’s bond auction went well. Interest rates increased a little and the bid to cover was twice as good as the auction a few weeks ago. It was a relatively a small €2.5 billion offering and tensions have eased.
The IMF has collected more than $100 billion from members this week and that is also reducing credit concerns.
FFIV, QCOM, EBAY and VMW released earnings after the close. The reactions were generally good and tech stocks might find their footing. This morning, DD, NUE and UNP posted results. DuPont beat expectations and provided great guidance. Union Pacific also beat expectations. Apart from coal demand, the CEO said he expects another record year.
I believe cyclical stocks are the key to a rally. If these facts can’t get off the deck the market will struggle to move higher. The leadership for this rally has been very narrow and Apple accounts or 12% of the S&P 500 rally this year. Cyclical stocks have lagged and a muted reaction to positive guidance would indicate that Asset Managers don’t believe this economic recovery is sustainable.
The big economic news came this morning. Initial jobless claims were expected to decline by 20,000 and they only fell by 2,000. Furthermore, last week’s initial claims were revised up to 388,000 from the previously reported 380,000. Jobless workers tend to postpone unemployment applications ahead of major holidays and Easter is still having an impact. The market might give this important indicator of job growth one more week to recover.
The Philly Fed and LEI come out 30 minutes after the open. Empire Manufacturing missed earlier in the week so the Philly Fed might be soft. LEI has been drifting lower for the last few months and that could also be light as well. This might spark a little selling, but nothing too major. Earnings will still be the major driver.
All of the pieces seemed to be in place. Earnings have been decent and guidance has been solid. There have not been many warnings and the “surprise factor” is fairly low. Economic conditions in the US and China are on the mend and central banks around the world are easing.
The SPY is oscillating around the critical $138 level. We’ve seen volatile moves in both directions. So far, earnings have not sparked the rally we typically see in the first two weeks of the cycle.
I have been selling out of the money put credit spreads and I am happy with those positions. Today, I will be watching cyclical stocks very closely. If they start to catch a bid, I will day trade from the long side. I still don’t trust this market and I want to keep my overnight risk exposure low.
The market should start off on a soft note. As the day progresses, I believe the initial claims number will carry less weight. Traders will focus on good earnings and strong guidance. I believe the market will grind higher in the second half of the day. The overnight earnings should be positive for the market tomorrow.
I’m not expecting a massive move, but the SPY should be able to challenge $139.50. A breakdown below $138 would be bearish.