Last week, the market surged to new highs. The news had a few negative wrinkles and they were completely ignored. I mentioned that we could hit a speed bump this morning and that is exactly what’s happening.
There are three pillars of strength that need to be in place and all of them have gone from green to yellow recently. This tells me that Asset Managers will not aggressively bid for stocks. They have time to evaluate conditions and they are not worried that they will miss the next big rally.
Economic growth in China is one of those pillars. Two weeks ago their official PMI came in weaker than expected. The PBOC has been tightening and investors are cautious. Their market was resting just above the 200-day moving average last week and that level has been breached.
Overnight they released industrial production, retail sales and GDP. All of these numbers missed expectations and growth forecasts for 2013 have been lowered from 8.2% to 7.7%.
Stable credit conditions in Europe are another pillar. Cyprus needs more money and Italy still does not have a governing party. Economic conditions continue to deteriorate and that is adding to the problem because spending deficits continue to grow.
Gradual domestic economic growth is the third pillar. Two weeks ago we had dismal jobs reports and ISM manufacturing/ISM services missed by a wide margin. Our economy needed to have a full head of steam heading into the sequester cuts. Now we could be hit with a double whammy.
As I mentioned, these pillars have not changed to red, but the caution light is flashing. Today, Empire Manufacturing was weaker than expected. Traders will be watching housing starts, industrial production, the Beige Book, initial claims and the Philly Fed. If economic activity continues to soften, the market will struggle.
Earnings season will kick into high gear this week. Revenues will be flat, margins will be healthy and cash flows will hit record levels. At a forward P/E of 14, stocks are attractive relative to bonds. If the pillars were green, the market would grind higher.
I am not bearish, but I feel we are close to a short term top. The market was able to rally off of its lows on Friday, but we still finished in negative territory. Stocks will try to bounce this morning, but there won’t be any follow-through. I expect to see the bid weaken late in the day and we will close near the lows of the day. Bullish speculators who bought the breakout will get flushed out.
Last week I sold my call positions and I am day trading. That strategy has served me well and I did not like the overnight risk profile. I have been able to capture most of the moves on an intraday basis and I will continue to use this strategy.
If you are not able to day trade, exit long positions today. I suggested doing that last week, and this might be your last chance to get out at a good level. If economic conditions continue to soften, the market will test SPY 153. If that happens, we will be able to evaluate earnings releases and we can see if that support level attracts buyers. If it does, there might be a nice short term buying opportunity. If that support level does not hold, the market could be in trouble heading into May.
My gut tells me that we will see a pullback and a rally this month. Conditions are changing and we need to be quick to take profits if that bounce materializes.
Day traders can short this market and I plan to today. I urge swing traders not to get short, just get out of your longs. The market needs to break technical support before you can get short overnight. The trend is still intact and picking tops is a losing proposition.