I don’t see any news that is going to “spoil the party”. European credit concerns have eased, earnings releases have been decent, economic releases have been positive and stock valuations are attractive. Asset Managers are waiting for a pullback and they might not get one.
Next week, the ECB will conduct another liquidity injection. European banks will gobble up as much debt as they can and that will pacify credit concerns. Short-term sovereign bond auctions should go well as banks take advantage of the “carry trade”.
The ECB’s maneuver is a temporary solution. Eurocrats will meet next week to discuss fiscal policies that should be added to the EU treaty. They won’t accomplish anything, but the market will not be overly concerned at this juncture. As long as investors feel that European officials are trying to reach a long-term solution, they will be satisfied.
Greece has secured its bailout and that will also relieve selling pressure. Portugal wants to renegotiate its bailout terms and Spain wants more breathing room since it does not believe it will be able to meet its 2012 budget. For now, the market is not concerned with these issues.
Earnings growth has declined significantly, but stock valuations are attractive relative to bonds. The S&P 500 is trading at a forward P/E of 14. Balance sheets are very strong and companies have been buying back shares. Asset Managers are rotating out of fixed income and into equities.
Domestic economic releases have been strong. Initial jobless claims were excellent yesterday and this morning, consumer sentiment came in better than expected. There are many releases next week and they should be positive.
The global economic releases should also be decent. This week we got the flash PMI’s from Asia and Europe. The market was content with the numbers and it should embrace the actual PMI results when they come out next week.
Asset Managers have been waiting for a pullback. The longer they wait, the more anxious they will get. There is a strong bid to the market and I don’t believe there is any news on the short-term horizon that will dampen spirits. Job growth has been improving and that bodes well for the Unemployment Report in two weeks.
I am long calls on strong stocks and I am long VIX calls. This strategy has been working nicely and option premiums are declining at a slower rate so my VIX position is holding up fairly well. The gains on my call positions have outpaced my VIX losses by a good margin. If the market starts to look toppy, I will start taking profits on my call positions.
Central banks are printing money and commodity stocks look particularly attractive.
Until we convincingly breakthrough resistance, I will maintain this hedged strategy and I will keep my size relatively small.
Look for a quiet day with a positive bias. The market should be able to grind through resistance next week.
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