The market has been treading water since the beginning of the year. Earnings season is in high gear and the bid will grow with each passing day. China’s growth might be slipping, but it won’t spoil this rally.
Earlier in the week, China posted GDP, industrial production and retail sales numbers that were just shy of expectations. Overnight, they released their flash PMI number and it dipped below 50. China’s growth target this year is 7.8%. We saw the PBOC inject liquidity earlier in the week and they will take action if conditions deteriorate. The S&P futures shed eight points when the news came out last night and that weakness has spilled over this morning.
Growth in Europe was much better than expected and that news has been overshadowed. The flash PMI rose to its highest level in 31 months. This could be the catalyst that pushes global markets higher. Europe has weighed us down for years.
Global credit concerns are low. PIIGS bond auctions have seen high demand and yields are at multi-year lows.
Treasury Secretary Lew said that politicians need to extend the debt ceiling. This might also be contributing to some of the nervousness this morning. The market will assume that both parties want to stay out of the headlines and that the debt ceiling will be extended at the last minute.
Financials kicked off earnings season and the reaction was positive. This sector will serve as the foundation for the next leg of this rally.
Intel and IBM were once considered tech barometers and they have lost their leadership role. Intel projects flat revenues this year, but there were some silver linings. PC sales seem to have bottomed and enterprise revenues were up 8%. That bodes well for corporate IT spending. IBM missed on both the top and bottom line. It continues to struggle and it blamed China for the miss. With these two giants out-of-the-way, the news will improve.
Transportation stocks (UAL, UNP and NSC), and tech (SNDK, FFIV, WDC and NFLX) posted strong results overnight. Cyclical stocks will struggle as the news from China is digested. However, the situation is not dire and improving conditions in Europe should spark buying.
Corporate profits are expected to increase 7% this quarter and cash flows will hit record levels. Over 6% of the daily market activity can be attributed to buybacks. This is a very powerful force and it will continue.
The longer and tighter the trading range – the bigger the breakout. The SPY has been treading water for three weeks and it is within striking distance of the all-time high. Once we break out, stocks will grind higher.
Buyers want to get in at the best possible level. When they see a weak round of news, they pull bids. Bullish speculators get flushed out and Asset Managers scoop stocks. The dips will be brief and shallow and this is a buying opportunity.
The macro backdrop is very bullish. Weakness in China will be offset by growth in Europe. Conditions in the US are stable.
The market will probe for support this morning. The damage will be contained and we will gradually grind our way back. Earnings releases will be market friendly and the bid will grow over the next week.
Look for stocks that are breaking through horizontal resistance. They already have the momentum and when the market breaks out, they will benefit from a strong tailwind. Use that breakout as your stop.
I am long and I want to give the market plenty of breathing room. My stop is at SPY $181.50. If we close below that level, I will exit my bullish positions. Until then, I am comfortable riding out this choppy price action.
This is a buying opportunity. Passive accounts can wait for a market breakout above SPY $184.50.