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Stocks pushed higher in the presence of soft economic data yesterday. This morning, durable goods orders fell 5.7% and that is worse than the 3.1% decline analysts were expecting. Macro conditions are deteriorating.
China’s flash PMI was worse than expected and Europe’s activity is dismal. Germany has been the cornerstone of strength and activity is slowing there. Every domestic release since the beginning of the month has missed expectations. It is true that the market climbs a wall of worry, but we have concrete evidence that conditions are deteriorating.
Earnings have been good and 65% of companies that have reported have exceeded earnings estimates. Unfortunately, only 40% have exceeded revenue estimates. The bottom line is being preserved through cost-cutting. Estimates for Q1 have been lowered so we should expect “beats”. Year over year revenue growth is flat.
Companies have record cash flows and balance sheets are strong. Bond yields are at historic lows and stocks are attractive on a relative basis. The market is pushing higher because there aren’t any better investment alternatives. Global money finding its way here and it is also pushing our market higher.
Ideally, the economy would be growing at a nice 3% pace and revenues would be up year-over-year. We would like to see corporations investing in plant and equipment and we would like to see them adding staff. That is simply not the case and this rally has an artificial feel to it. It is all propped up by central banks.
Asset Managers do not fear that they will miss the next big rally. With stocks at an all-time high, they will wait for economic conditions to improve. The bid has weakened and I believe the next round of profit taking will break support.
It is foolish to stand in the way of this powerful rally. Picking tops is a great way to go broke.
I will day trade this rally and I will keep my overnight exposure to a minimum. I will also be watching for signs of exhaustion. A rally that reverses and late day selling are early indications. If there is follow-through and technical support is breached (SPY $155) we will have confirmation. I will not buy puts until I see that price action. When the market opens on its high and closes on its low over a period of days, we will know that the trend has reversed.
I don’t mind missing the last 1% to 3% of this rally. I can still catch most of the move on an intraday basis. The thought of getting long and having the door slammed in my face is keeping me on the sidelines.
Traders are discounting the economic news on the notion that this is a temporary dip similar to the one we saw in April 2012. I have enough evidence to suggest that this is more than a seasonal adjustment. With fiscal spending cuts taking effect in a few weeks, I will error on the side of caution.
Initial jobless claims will be released tomorrow and GDP will be released on Friday. Next week we will get ADP, ISM manufacturing, ISM services and the Unemployment Report. Any surprise favors the downside.
After a big run yesterday, stocks should take a breather today. They want to inch higher, but we are approaching the all-time high. I don’t believe we will break through until we get some of the economic news next week.
I hope I am wrong and the market breaks out next week. My gut tells me to tread cautiously.