The News Will Pick Up Next Week. Stay Long Into the Jobs Report April 6th
Yesterday, the market tried to push higher after a strong showing on Monday. In the last hour of trading, stocks pulled back and we finished slightly lower for the day.
I did not feel the news two days ago justified the big rally and I expected some retracement. Traders read between the lines during the Fed Chairman’s speech and illusions of QE3 were revived.
Economic conditions are improving and interest rates are starting to move higher. It will be hard for the Fed to maintain its zero rate policy through 2013 and I believe another round of easing is out of the question.
The market is simply looking for anything to trade off of and we have been in a news vacuum for the last two weeks. That will change in a matter of days.
Next week we will get the official PMI’s from China and Europe, ISM manufacturing, ISM services, ADP employment, FOMC minutes, and initial jobless claims. The PMI’s from Europe and China should not differ much from the flash numbers last week. They will be soft and they could weigh slightly on the market Monday. On Wednesday, ADP employment will be released and I’m expecting a very strong number. That should push stocks higher.
Earnings season starts on April 10th and there have not been many warnings. Companies that have been posting results recently have produced good results. In typical fashion, stocks will rally into earnings season.
Jefferies & Co. posted strong trading results last week and that bodes well for Morgan Stanley and Goldman Sachs. Both companies release early in the earnings cycle and that news should fuel the financial sector.
Financial concerns in Europe have subsided. Peripheral interest rates feel like they want to move higher and I will be keeping a close eye on yields. The ECB might not accept PIIGS bonds as collateral for future loans and that could reignite fear in a month or two if it comes to pass.
Cyclical stocks have not caught a bid and that tells me Asset Managers are concerned with China’s economic activity. Sentiment would improve instantly if the PBOC lowers bank reserve requirements. May traders are expecting that to happen in the next few weeks.
The path of least resistance is up, but the gains will be hard-fought. I believe this rally has two or three good moves before it stalls. My target is SPY 146. As stocks challenge that level, I will start to sell my call positions.
As long as credit concerns in Europe are contained, the sell-offs should be limited (5% correction). If interest rates in Europe start to climb, Asset Managers will stop rotating out of fixed income and into growth. They will get into “risk off” mode and the rally will stall.
Economic conditions in China should be stable and I am expecting gradual improvement. That would put a bid under the transportation sector and commodity stocks.
Durable goods orders rose 1.7% and the market did not have much of a reaction. The final revision to Q4 GDP should come in as expected and initial claims will fall by a couple thousand. The news will be benign.
Monday’s rally seemed very “fluffy” and I believe those gains will slowly slip away this week. Look for lackluster trading.
Stay long into the Unemployment Report a week from Friday. Know that you will take a little heat along the way. If your exposure is small, consider adding early next week.