Good Earnngs Will Be Off-set By Weak Economic Releases. Reluctant Rally Ahead.

April 16, 2013

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My thoughts and prayers go out to the victims of the terrorist bombing in Boston. This tragic event accelerated yesterday’s decline and the move was over-extended. In pre-open trading, the S&P 500 is up 15 points and we are seeing a small relief rally. A good round of earnings is helping to restore confidence.

It is important to remember that the market was in trouble before the bombing. Conditions are changing and the bid has weakened. Asset Managers no longer fear that they will miss the next big rally. The recent round of dismal economic releases will provide breathing room.

If growth in the US and China was stable, Asset Managers would aggressively buy stocks during earnings season. They did not get the 5% dip they were hoping for and time was running out.

China missed on all of its numbers Sunday night (industrial production, retail sales and GDP). Growth projections for 2013 have been lowered. Domestic economic releases have also disappointed (ADP, the Unemployment Report, ISM services, ISM manufacturing and Empire Manufacturing). Asset Managers will not chase stocks near the all-time high. They will wait for evidence that economic conditions are improving.

In the US, we needed to have a full head of steam before spending cuts kick in. Now we could be hit with a double whammy.

European economic conditions continue to deteriorate. The slowdown is spreading to core countries and lower tax receipts are resulting in bigger deficits. Credit concerns are currently subdued but they can flare up at any time. The last two years, European credit concerns have escalated in May. Cyprus and Italy could be the catalysts this year.

Earnings season has started. Revenues will be flat, profits will grow modestly and cash flows will hit record levels. Stocks are still relatively attractive, but they won’t jump if macro conditions are slipping.

Previous market declines this year have produced slingshot recoveries and the market made new relative highs. I don’t believe we will see that this time around. The bounce will be sluggish and we will be lucky to challenge the all-time high. Profit taking will not be met with aggressive buying and Asset Managers will wait for better price levels.

It is too early to get bearish. We still have a couple of weeks of good price action left. Focus on the strongest sectors and look for strong trends. Use a hit and run approach. Stocks that broke out last week and pulled back to that level can be purchased as long as that breakout holds. If you get long and it fails, stop the trade out.

I will be day trading the next two weeks. I don’t like the overnight risk profile.

I will also be watching for signs of a top. If the market struggles to challenge the all-time high, that would be bearish. A lower high and late day selling would also be bearish. A second round of selling in the next week with follow through would also be bearish. I don’t believe we will see this type price action for a few weeks because of earnings season.

The market has been in a strong uptrend and picking tops is a losing proposition. I need to see concrete evidence that the bid has weakened and I want to see a technical breakdown.

Good earnings news will be offset by troubling economic releases this week. The market will reluctantly grind higher.
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