Look for Sluggish Price Action With A Bullish Bias. Banks Could Rally Late In the Week.

March 12, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Last week, stocks tested the downside and they quickly rebounded on strong employment releases. The market is challenging multi-year highs, but it needs a catalyst to convincingly break out.

In February, 217,000 jobs were created and that was much better than expected. January’s number was increased by 40,000 and the market rallied on the news. The economic releases in the last week (GDP, Chicago PMI, initial claims and retail sales) have been decent and I expected more “punch” out of Friday’s number. If job growth can’t spark a breakout, nothing can.

Private investors swapped Greek bonds last week and a disorderly default was avoided. European credit concerns are off the table and central bank comments this week should be very “dovish”. European banks tapped the ECB for €500 billion in the LTRO2 and they will support short-term sovereign bond auctions.

China’s economic releases last week were a little soft and over the weekend we learned that exports declined more than expected. This news was offset by a much lower than expected inflation reading. China’s CPI fell to 3.2%, the lowest level in years. The Peoples Bank of China said that there is a lot of room for easing. This news should provide a strong bid to their market.

The domestic economic news this week is very light. On Thursday we will get initial claims, Empire Manufacturing and the Philly Fed. These releases should be positive. We will also get the results of the US bank stress tests. Bad loan write-downs are decreasing and banks are pushing through foreclosures. I am expecting a positive reaction.

Earnings growth has slowed, but stock valuations are attractive. The S&P 500 is trading at a forward P/E of 14. Interest rates are at historic lows and Asset Managers will be rotating out of fixed income and into equities.

Earnings season is only a month away and stocks typically rally into the announcements. That means the market needs to tread water for the next two weeks. As it consolidates within a tight range, it will gather strength. I don’t see any other catalyst that could push us through resistance.

The market is overbought and any major surprise favors the downside. Traders are searching for any reason to sell, but they can’t find one.

Asset Managers would love to buy a dip and any pullback will be very brief. Last Tuesday’s selloff is a great example and it only lasted one day.

The news this week will be positive, but it won’t generate a big rally. Financials could push the market higher on Thursday.

The S&P 500 is up against a major resistance level and the gains will be hard fought. Look for sluggish price action with a positive bias.

I am long calls and I am not hedging my positions. I don’t see any major speed bumps ahead and I only have a third of my normal position on. If we do get a pullback, I will add to my call positions.

Stay long and keep your size small. If we continue to move higher, you’ll be happy. If we get a pullback, you need to view it as an opportunity, not a setback. That will be your chance to add. You can only have that mindset if your exposure is small.

There are times when you can spread your wings and get aggressive – this is not one of them.
.
image


Previous Bulletin

March 9, 2012

Next Bulletin

March 13, 2012
Top