The Economic News This Week Should Be Decent. Stocks Should Be Able To Grind Higer.

February 27, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The news over the weekend was very light. That will change this week and there are many events that will influence trading. Traders are searching for a catalyst and the Unemployment Report on March 9th could do the trick.

Last week, China released its flash PMI. It was under 50, but the decline in economic growth has stabilized. This week we will get the official number and it should be “market friendly”. China lowered bank reserve requirements last week and that will backstop the market. Shanghai might consider softer real estate restrictions and that would also lift spirits.

The economic conditions in Europe are tenuous. France and Germany are treading water and the rest of the EU is struggling. Europe will also release its official PMI this week. I am not expecting any surprises.

The G20 is meeting in Mexico and global officials are discussing IMF funding. The potential still exists for a “firewall” and members will be asked to contribute to the fund. Germany had been opposed, but it is reconsidering. I don’t believe nations outside of the EU will embrace the idea. The US has maintained that Europe has all of the resources it needs to solve its own problem.

Analysts believe that European banks have been tapping the ECB. This week we will learn to what extent. The ECB will release the results of the second round of its cash infusion (LTRO) on Wednesday. Many expect loans up to $500B and the ECB’s balance sheet could top $1T. This news should be positive for the market.

European officials are supposed to draft a fiscal policy plan for the entire EU. They had a summit last week and a few months ago they set a deadline for March. Interest rates have pulled back and the pressure is off. I believe Eurocrats will drag their feet for many months without any resolution. Eventually, this will weigh on the market.

Domestic economic releases include durable goods, consumer confidence, GDP, Chicago PMI, the Beige Book, initial jobless claims, ISM manufacturing, and personal income. These numbers should be generally positive.

Job growth has been steady the last two months and that bodes well for the market. I believe stocks will have an underlying bid as the Unemployment Report approaches in two weeks.

Earnings season has almost ended and the results were fair. The S&P 500 is trading at a forward P/E of 14 and stocks are attractively valued. Asset Managers have been waiting for a pullback and they are not getting one. With each passing week, they will get more aggressive. Money Managers who are under allocated are starting to worry.

I don’t see any “flies in the ointment” this week. The market is up against major resistance and it has been able to creep higher. One good news about could convincingly push us through.

The market tested the downside early this morning. There wasn’t any news to justify the decline and stocks quickly rebounded. I am expecting a bullish bias this week with lackluster price action. Try to stay long.

I am long calls and I am long VIX. This strategy has been working out beautifully. Alternatively, consider buying calls on strong stocks and puts on weak stocks. I would use a ratio of 3 to 1. Option premiums are cheap and you should be focusing on buying strategies. Use the bullish and bearish watch lists in the Live Update table. Focus on stocks that are consistently rising to the top.

I don’t see any trouble ahead for a couple of weeks.
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