Yesterday, the market tested the downside after BHP said that iron demand in China was flattening out. Traders took this as a sign of economic contraction, but this news has already been circulated. It was the only decent “story” to trade off of so bears tested the downside.
Asset Managers pulled their bids so that they could gauge the selling pressure. By midday, stocks had recovered most of their losses.
The overnight news is very light again this morning and the market is flat. In order for the market to move higher it needs help from commodity stocks, cyclicals and rails. Tomorrow’s releases could get these groups moving.
China and Europe will release their PMI’s. The economic news out of China has been soft, but their PMI rose above 50 last month. Any improvement would be seen as a positive and that would help commodity stocks and heavy equipment manufactures. The Peoples Bank of China stands ready to reduce bank reserve requirements and that will keep the bid under their market.
Europe’s flash PMI is expected to improve slightly from 49 to 49.6. That is just below the economic expansion level and dismal results are expected. Anything better than 49 would be “market friendly”.
FedEx will post earnings tomorrow. It is considered an economic barometer and I believe the guidance will be strong. That should get transportation stocks moving in the right direction. In order for the market to move higher, it needs participation from this sector.
With European credit concerns off the table, we good economic news needs to pile up. The market will consolidate in a range and eventually it will jump higher. The moves will come overnight and you’re either in, or you are not. All of last week’s gains came in one day. These moves will be very tough to time.
I am long in the money calls in May. I like in the money options because I believe the market downside is contained (should find support at SPY 138). The calls don’t carry much time value and they will move almost point for point with the stock. The market will be boring and I need to give the positions time to work. I have gone out to May so that I do not have to worry about rolling the positions. I only have 40% of my normal position on. If the market grinds higher, I am happy. If we get a pullback, I am ready to add.
Earnings season will begin in three weeks. That means that we will see buying in another 10 days. It could start with a favorable Unemployment Report. Weather conditions in the US have been unseasonably warm and that will help the construction industry. The last three winter months have seen the highest existing home sales in five years. Inventories are being worked off and that bodes well for new construction.
I like energy stocks. They have lagged the market and with oil over $100 per barrel, they are cheap. Global demand is only 1 million barrels a day under global supply and any supply disruption will cause a spike in oil prices. As economic conditions improve, the demand for oil will increase. Be patient and watch this sector. When it breaks out, it could drive the S&P 500 to a new relative high.
I am not looking for an explosive move higher tomorrow. I believe the news will be good, but not great. Stocks will grind higher in a boring fashion and we will see rotation into cyclicals and commodity stocks.
The S&P 500 has another 50 points before it hits major resistance. That level will be formidable and we should reach it late in April. We are overdue for a pullback and I believe we will see selling halfway through Q1 earnings season (May).
There is still plenty of upside. Look for sector rotation and position yourselves in cyclical and commodity stocks. Hang on to your calls and add on strength.
Today’s trading range will be very compressed. The market is drifting lower due to a lack of interest. Asset Managers don’t want to chase and they are pulling their bids. This is much different that a round of selling. When Asset Managers get news they like, they will pile back in.
The price action should pick up towards the end of next week.
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