Last week the market consolidated. It backed off of a new relative high and it waited for new information. Cyprus was blamed for the soft price action and that issue has been resolved.
Over the weekend, Cyprus agreed to a bank resolution. This was a small €10 billion problem and I told you it would not be a blip on the radar a few weeks from now.
European credit concerns are low. Conditions in Ireland, Portugal and Spain are improving. Last week Spain held a successful bond auction and yields remain low. Italy will resolve its political issues and PIIGS concerns will not spoil this rally – yet.
Economic conditions in Europe are dire. Last week the flash PMI came in much lower than expected. This news is already priced into the market. However, if we don’t see some improvement in coming months, it could be an issue. France (the second largest economy in Europe) is particularly weak.
China’s flash PMI came in better than expected last week. This was a critical piece of information and it could have spoiled our rally. The PBOC has been tightening and China hit an economic soft patch. If that trend had continued for a second consecutive month, we would have seen profit taking. China is still the growth engine of the world and it is back on track.
US economic conditions are stable. The FOMC projected a 2% growth rate for 2013 last week. This includes the impact of the sequester and this is a Goldilocks forecast. The Fed will continue quantitative easing and it will carry a huge balance sheet for a long period of time.
The economic calendar is light this week and there are only a couple of minor releases on Thursday. Next week, the news will pick up. ISM services, official PMI’s and employment reports will dominate the scene. Domestic releases have been bullish and these numbers will give Asset Managers the confidence they need to buy stocks ahead of earnings season (April 8th).
Mutual funds have underperformed the market. Managers have been waiting for a 5% pullback and they haven’t gotten one. They will chase performance and buy stocks before the quarter ends this week (window dressing). The bid will strengthen and I believe the S&P 500 will make a new high this week.
We have been waiting patiently for this consolidation to run its course. I have half of my target call position on right now. I will add to it this week and I plan to get to 65%
Buy May calls. They will retain their value relative to April options. Look for stocks that are in an uptrend, have consolidated and are breaking through horizontal resistance on strong volume. These moves typically last a week.
If you look at today’s chart you will notice that the market tends to pullback after it makes a new relative high. That happened in December, February and March. You’ll also notice that each retracement is less severe and it is shorter in duration. This is a very bullish pattern.
The market opened higher after the Cyprus news and it quickly probed for support. Prices will stabilize and the market will grind higher this afternoon.
The price action will be bullish this week, look for opportunities to get long.