The news over the weekend was generally positive and the market should be able to push higher. Gains will be hard fought since we are bumping up against major resistance.
China lowered bank reserve requirements by .5%. Last week, officials said that they expect inflation to drop to .4%. That is the best level in almost 2 years and it could lead to more easing.
Greece was able to renegotiate “haircuts” and private investors will get paid $.30 on the dollar. This paved the way for a deal with the troika. Greece will secure its next bailout, but this is a chronic issue that will continually plague the market.
Spain held a very short-term bond auction and the results were good. Any maturities under three years will be met with strong demand. European banks have unlimited access to three-year funds and the ECB will provide another massive liquidity injection ($500 billion) next week. As long as the maturity is less than 3 years, they will play the “carry trade”.
Earnings are decent, but not stellar. Wal-Mart missed while Macy’s and Home Depot beat. Retailers will dominate the earnings scene this week and profit margins will be small. Stores were open later and deep discounts were used to lure shoppers.
Economic releases are the focal point now that credit concerns have eased and earnings season is winding down. Existing home sales, initial claims, and consumer sentiment won’t move the needle. The biggest news will come Wednesday evening when Europe and China released their flash PMI’s.
The decline in China’s growth has stabilized and even if the number comes in light, traders will rationalize that additional easing is right around the corner. Negative news is expected out of Europe and any surprise should be to the upside. Germany and France are treading water and the rest of the EU is struggling.
Earnings growth for Q4 was only 2.6% for the S&P 500 if you strip out Apple. That is the worst showing in over two years and it demonstrates that the good news is very concentrated. The breadth of this rally has been shallow.
Stock valuations are attractive and balance sheets are strong. Low interest rates are pushing investors into riskier assets and the market should be able to grind higher.
Asset Managers don’t want to chase stocks at the top of the range. They want to buy on a pullback and that means any decline will be brief.
The news over the weekend was largely expected, but it was good. There aren’t any “flies in the ointment” this week and the market will challenge major resistance at SPY 137. We’ve been consolidating in a tight range for three weeks and bulls have gathered strength.
Look for a quiet grind higher this week. The jobs numbers have been improving and that could pave the way for an excellent Unemployment Report next week.
I am long calls on strong stocks and I am hedging that position with VIX calls. Option implied volatilities have not declined much and this position is performing well. I still feel the market could break either way and I am keeping my size small.
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