Yesterday, the market rebounded from Tuesday’s decline and half of the losses were erased. A strong ADP number brightened spirits and this morning the S&P 500 is up 10 points before the open. The dip from earlier in the week was nothing more than profit-taking.
This morning, initial jobless claims rose by a few thousand. Job growth is steady and that bodes well for tomorrow’s Unemployment Report. Analysts are expecting 210,000 new jobs in February and I believe that number could be conservative. ADP reported that 216,000 new jobs were added in the private sector during February and that is much better than 173,000 jobs reported in January.
Jobs are the key to a sustained economic recovery. In general, the economic releases have been very encouraging. GDP, retail sales, ISM services and Chicago PMI all exceeded estimates last week.
Central banks around the world are easing and European credit concerns have subsided. Earnings growth has slowed, but stock valuations are attractive. Interest rates are at historic lows and Asset Managers will rotate out of fixed income and into equities.
Before the close, we will start to get a feel for private investor participation in the Greek debt swap. If more than 50% of bond holders agree to the terms, Greece will avoid a disorderly default. I am hearing that the participation could come in between 80% and 90%. This result would spark a relief rally.
Overnight, China will release its PPI/CPI. Chinese officials stated two weeks ago that they believe inflation will decline to 4% in February. This would be the lowest level in years and it would pave the way for future easing.
I am expecting a decent reaction to the overnight news and the market should have a positive tone before the Unemployment Report tomorrow. If job growth in February exceeds consensus estimates (210,000) the market could break through resistance.
Bullish sentiment was extremely high and speculators needed to get flushed out. Asset Managers briefly pulled their bids on Tuesday and some of the “air” was let out. The smart money quickly snapped up shares.
There are too many positive influences and the market is not ready to roll over. The price action should remain positive and Q1 earnings season is only a month away.
Stocks will move higher today, but the price action will be tenuous. Traders will not fully embrace this rally until they see the results from the Greek swap. If the participation is well north of 80%, we could see an after-hours rally.
I suggested buying calls on Tuesday’s dip and on yesterday’s rebound. I added to my call positions and I sold my VIX calls Tuesday and Wednesday. My longs are unhedged. When the momentum from this rally stalls, I will start scaling into VXX.
I have 35% of my normal position size on right now. The price action has been lackluster and I don’t want to get too aggressive.
Focus on stocks that are rising to the top of the Live Update Table in the DAILY REPORT. In particular, look for stocks that have consolidated and are breaking out to new relative highs. Also look for stocks that pulled back to test the recent breakout. They will bounce off of this support and resume the rally now that the wind is at their back.
If you dragged your feet the last two days, know that you are late to the game. You can take a small bullish position today, but don’t go overboard.