Yesterday, the market took a nasty spill. The economic news is not consistent with an all-time high and traders want continual confirmation.
China’s PMI was mixed early in the week and Europe’s PMI was dismal as expected. ISM manufacturing disappointed and ISM services came in at the lowest level since November. ADP missed by 30,000 jobs and initial jobless claims spiked 40,000 this morning. The expectations for tomorrow’s Unemployment Report have been reduced.
Alcoa will kick off earnings season on April 8th. Basic material stocks have been battered and guidance could be “back-loaded” for 2013. This is not the release we are looking for. All of this news could result in a decline to SPY 153. That is a major support level and I expect it to hold.
In a week, banks will dominate the earnings scene. Loans are increasing, write-downs are minimal, asset management fees are higher due to a rising market, trading volumes are up and investment banking fees are rebounding. I believe financial stocks will lead the next leg of this rally and the market will make a new all-time high.
In the last two years, we have seen a small economic soft patch in April. The ISM numbers are still above 50 and they are consistent with a Goldilocks economy. The Fed will remain accommodative.
European credit concerns are always a wild card. This morning, the ECB said that it will remain accommodative. The Cyprus banking crisis is behind us and PIIGS yields are stable. I don’t believe European credit concerns will be an issue for at least a few weeks.
China’s economic growth is stable at 8%. There is some concern that new real estate restrictions will weigh on economic growth. Property prices in March were up and I don’t believe this will be an issue in April.
Notice that I am focusing on the next few weeks. I don’t care what the market does after that. I still believe we have one good push higher. Once I see the earnings, I will know where we go in May.
Corporate revenues will be flat, but margins will be healthy. Cash flows will hit record levels and balance sheets have never been stronger. US 10-Year Treasuries have a lower yield than the dividend yield on the S&P 500. At a forward P/E of 14, stocks are attractively valued. As long as global credit risks remain low and interest rates are stable, the market will rally.
Asset Managers have been waiting for a 5% pullback and they haven’t gotten one. With each passing day, they get more nervous.
The bid is strong and at best, the market will pull back to major support at SPY 153. That level will attract buyers and we will slingshot to new highs. This pattern has occurred three times this year.
If you are a short term swing trader, lighten the load for a few days and wait for JPM and WFC next Friday. If you have a 2 to 3 week time horizon, stick with long positions and look for opportunities to add.
Know that the bid is strong and that declines will be brief and shallow. April has historically been a strong month.