After a big run we saw a little profit taking this week. Support was established Wednesday and stocks moved higher yesterday. The price action will be very choppy for a couple of weeks and there won’t be much follow-through. Get ready for the summer doldrums.
Major economic releases are behind us and earnings season is winding down. Congress is in recess and there won’t be any debt ceiling ultimatums. This quiet period is typical for August and traders take time off. I plan to do the same and I will not be publishing daily market comments on Monday or Tuesday.
The economic news this week has been good. China’s numbers were better than expected and exports to Europe increased 3%. Analysts have been calling for a bottom in the EU. Their official PMI ticked into positive territory for the first time in months and any sliver of improvement will attract buyers.
Domestic activity also improved. GDP, ADP, ISM manufacturing, Chicago PMI and ISM services all exceeded estimates. Yesterday, initial jobless claims came in at 333,000. The four-week moving average has fallen to its lowest level since November 2007.
Traders are accepting the fact that the Fed will taper. The FOMC sees improving economic conditions and even though bond purchases will decrease, they will remain accommodative.
Earnings season has been lackluster. Year-over-year comps at their worst level in many years, but cash flows are at record levels. Corporations are lean and mean and any uptick in demand will go straight to the bottom line.
Asset Managers won’t chase at an all-time high, but they will buy dips. The bid is strong and the market has a safety net. Any decline will be brief and shallow. I expect support at SPY $167 to hold over the next few days.
The calendar is very light and momentum should keep sellers at bay. As long as SPY $167 holds, I suggest focusing on bullish trades.
The market might not move much, but there will be individual stories. Look for stocks that are breaking through horizontal resistance after posting strong earnings. These moves tend to last a few days. Ride the breakout and get out as soon as the momentum stalls.
Keep your size small. If you can, take some time off. Choppy, light volume markets are difficult to trade. Conditions will improve in a couple of weeks.