Yesterday, stocks drifted lower after China and Europe posted weaker than expected flash PMI’s. The market is searching for direction and it has been stuck in a news vacuum. The economic releases were not disastrous; they were simply the only material information available this week.
As a result, Asset Managers pulled their bids. They will gauge the selling pressure and they will wait patiently for signs of support. Once they get it, they will be buying aggressively.
When I saw the news yesterday, I suspected that the market would decline and we might see follow-through selling today. The overnight news was light and the drift lower is due to a buying boycott, not selling pressure.
Nike, Oracle, Micron and FedEx have all released solid earnings this week. In each case, the stocks have drifted lower. Good news was expected and we are seeing a little profit-taking. Once the market regains its footing, these stocks will rebound. In general, they have beaten estimates and provided good guidance.
Bears will be able to probe the downside for a few more days. As we get closer to the jobs report, the bid will strengthen. Construction spending has been rebounding and building permits are on the rise. Warm weather across the US has put builders back to work earlier than normal. I am expecting a strong Unemployment Report.
The market should rebound on the news and earnings season will be right around the corner. Stocks have rallied into earnings for 10 consecutive quarters and that impetus will take hold in two weeks.
European banks are flush with cash that they have borrowed from the ECB. Credit concerns have subsided and if they flare up, the ECB will launch LTRO3. This is a short-term solution, but it should pacify credit concerns for at least a few months. Structural debt problems exist and huge deficits will raise credit concerns later in the year.
Central banks around the world are easing and it is never smart to fight “easy money”. Interest rates are at historic lows and $6 trillion is parked on the sidelines (short-term treasuries). This money will rotate into growth stocks.
The economic releases are light next week. Durable goods orders fluctuate like mad and the market rarely has a sustained reaction to the number. The final revision to Q4 GDP will be released and I’m not expecting any surprises. Economic growth came in at 3% during the second revision and that is a solid number.
Watch for signs of late day buying. When you see that, start to scale into call positions. I would not add today. There are not any major weekend releases and you should not be in a hurry to buy.
The market should find support at the SPY 138 breakout. We could slingshot from that level to new relative highs into earnings season.
The market tried the downside today and the selling was contained. We should fall into a tight range the rest of the day.