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Earlier this week, the market declined on Greek credit concerns and a “soft” services PMI in China. The news did not justify the 23 point decline in the S&P 500 and I told you this was an opportunity, not a setback.
Bullish sentiment was too high and speculators needed to get flushed out. The market had not been able to break through resistance even after good economic news (GDP, initial claims, retail sales and Chicago PMI). Asset Managers pulled their bids and they wanted to gauge the selling pressure.
Looking ahead, my forecast told me that the news would be very bullish heading into the weekend. The market did not even get close to testing support before it rebounded. On Wednesday, ADP employment came in much better than expected. That news set us up for a decent initial claims number on Thursday.
After the close yesterday, we learned that 85% of Greek bondholders agreed to the swap. That was right in the middle of the range I was looking for and Greece avoided a disorderly default.
Last night, China reported that its CPI declined to 3.2%. That was much better than expected and the market liked the news. Chinese officials voiced their optimism a few weeks ago and now that inflation is contained, they can continue to ease. This is the lowest inflation reading in years.
This morning, the Unemployment Report came in much better than expected. Analysts were expecting 210,000 new jobs in February and 217,000 jobs were created. January’s number was revised upward by almost 40,000. This news will have a lasting effect and it will attract investors.
The news next week is fairly light. Central banks (including the Fed) will meet and the rhetoric will be “dovish”. Conditions are improving, but not enough to impact policies.
Earnings season is a month away and stocks tend to rally into the announcements. That means we simply need to get through the next two weeks before we have that catalyst.
Traders would love to see a dose of bad news so that they can knock this market down. We saw how vulnerable stocks are at the top of their range last Tuesday. As I look ahead, I don’t see any speed bumps.
European banks gobbled up ECB loans and credit concerns are off the table for at least a month. Interest rates in Europe are declining and Greece bought itself a couple of months. Earnings have been decent and stock valuations are cheap. The economic news in the US has been improving and consumer sentiment is on the mend.
I am long calls and I am not hedged. I’ve made great money this week and I hope you climbed aboard during Tuesday’s pullback. When the momentum stalls I will start scaling into a VXX position to hedge my longs. I don’t see that happening for at least another 30 S&P 500 points.
Look for a gradual grind higher next week. Don’t expect any explosive moves. Shorts have covered and we won’t see any panic buying. As the sentiment improves, cyclical stocks will get more play. I suggest focusing on strong companies in that sector that are bouncing off of support. As always, use the Live Update table as your guide.