We had a number of events that could have moved the market this week, but did not. The outcomes were predictable and stocks are trading in a tight range. I don’t see that changing in the next week.
European banks tapped the ECB for €530 billion. The participation was broad-based and European interest rates are stable. Credit concerns are temporarily off the table and that is bullish for the market.
Eurocrats are meeting to discuss a massive “firewall” to prevent contagion. If the funding is not predominantly based in Europe, it won’t happen. The US and China have no interest in bailing out PIIGS.
Structural deficits are the real problem and I doubt Eurocrats will draft meaningful fiscal reform. A unanimous decision would be required to add the plan to the treaty. At best, we will see a watered-down solution that trims budget deficits over decades.
The ECB’s liquidity injection will have a short-term impact. EU members will continue to run massive deficits and credit concerns will resurface this summer. When European interest rates start to rise, we’ll know trouble is right around the corner. Not to worry, there’s always room for injection LTRO3.
The PMI’s in China and Europe were in line and they did not spark much of a reaction. Next week, China will release its CPI and officials believe it could fall to 4%. That would pave the way for further easing and the market would rally on the news. China’s market has rebounded nicely this year.
Domestic economic releases were good this week. Q4 GDP, Chicago PMI, retail sales and initial claims all exceeded estimates. Durable goods (very volatile) and ISM manufacturing were down slightly, but not enough to dampen spirits.
Employment conditions have been improving and that bodes well for next Friday’s Unemployment Report. I believe Asset Managers will bid for stocks ahead of the number.
The market has been sluggish and although it is inching higher, it lacks punch. It almost feels like traders are looking for a reason to sell, but they can’t find one.
The only potential “fly in the ointment” will come on March 7th when Apple releases its new product. The stock has been racing higher and it accounts for 12% of the S&P 500 rally. This could be a “sell the news” event and it could temporarily weigh in the market.
The SPY is making new multiyear highs and no one is foolish enough to step in front of this freight train. Any meaningful dip will quickly be erased (unless Israel attacks Iran).
I am long calls on strong stocks and I am long VIX calls. I am focusing on stocks that have rallied, consolidated in a tight trading range and are breaking out to new relative highs. These candidates have the momentum I’m looking for and you can find them at the top of the Live Update table in the Daily Report. You need to be in and out as soon as they lose their mojo.
Stock and option volumes are down 6% this year. The price action is very lackluster and we will see more of the same next week. Stay long and stay hedged if you are carrying overnight positions.