Stocks Might Rest But The Next Move Is Higher!
The market demonstrated its resiliency when it rebounded from a round of bad news last week. Japan’s debt was downgraded by S&P, Ford missed earnings by a large margin and political unrest was spreading in the Middle East.
Conditions in Egypt are concerning, but the Suez Canal remains open. This is a huge source of income for the nation and it has never been in jeopardy. Almost 10% of the world’s goods are shipped through it and it represents the only real economic threat. Many analysts fear that the protests will spread to other Arab nations, but the market won’t price that in until it starts happening.
The bid to the market is very strong and stocks rebounded sharply, making a new 30-month high on Tuesday. This has been an important week, filled with positive economic releases. ISM manufacturing climbed to 60.4, a level not seen in more than six years. ISM services also posted strong gains and the number beat estimates. The employment numbers have generally been bullish. ADP employment showed that 187,000 jobs were added to the private sector in January. Yesterday, initial jobless claims fell by 40,000 from the previous week. The table was set for a strong Unemployment Report this morning.
Analysts were expecting 140,000 new jobs in January. Unfortunately, only 38,000 new jobs were created. This number was a bit of a disappointment, but the market held strong. The unemployment rate dropped to 9% and economists believe that was due to an increase in self-employment which is not counted in the jobs number. Prior months were also adjusted to reflect 40,000 more jobs than initially reported. From my perspective, this was a perfect number. Traders were able to find the “silver lining” and the number was weak enough to keep quantitative easing on the table.
Earnings have been stellar. More than three quarters of the earnings releases have exceeded estimates. Profits are up 35% year-over-year and top line growth is picking up. Interest rates are relatively low and money will rotate out of bonds and into equities.
The ominous credit crisis clouds have temporarily parted and the market will move higher. The new credit facility established by the ECB has gained widespread acceptance and it will attract sovereign investment. The first bond auction was vastly oversubscribed.
Greece and other PIIGS countries will repurchase debt and borrow funds at a much cheaper rate from the new credit facility. Germany was once opposed to the bailouts, but they have had a change of heart. Their Prime Minister will propose widespread EU policies that focus on six primary areas this weekend (abolition of wage indexation systems, agreement on mutual recognition of education qualifications, creation of a common base for assessing corporate tax, adjustment of the pension systems, establishment of a national crisis management regime for banks and new legal measures to force countries to commit to tough fiscal policies through a “debt alert mechanism). This sounds encouraging, but getting debtor nations to willingly “buy-in” is another matter.
I don’t see anything that can stand in the way of this rally on a short-term basis. The market is priced for good news and it needs to gather strength for the next move higher. Any pullback will represent a buying opportunity. Commodity stocks and cyclicals are my favorite longs. I am selling out of the money put credit spreads today.
The sharp reversal after only one day of selling convinced me that Asset Managers are anxious buyers and the bid is strong. I do not expect a major decline in the near future. The news next week is light, look for higher prices.