Yesterday the Dow hit a new all-time high. Overseas markets set a positive tone before the open and ISM services came in much better than expected. Stocks surged and they spent the rest of the day in a tight range. As we approach the all-time high on the S&P 500, don’t expect a blow-off rally. The move will be very controlled.
Asset Managers are still gathering information and they need solid evidence of an economic recovery before they buy at this level. Domestic economic releases have been fantastic. This morning, ADP showed that 192,000 jobs had been added to the private sector in February. Analysts expected 155,000 new jobs and this number bodes well for Friday’s Unemployment Report. Initial jobless claims have been declining and employment is the key to a sustained economic recovery.
All of the recent domestic news has been excellent. GDP inched into positive territory, durable goods orders were strong, Chicago PMI hit an 11-month high, housing starts were solid and ISM manufacturing/ISM services beat estimates handily. Economists believe that we are coming out of a soft patch and recent releases are consistent with that theory.
With each passing week, the bid will grow. The Fed will continue quantitative easing well into the future and they plan to carry a huge balance sheet for a long time. This means traders won’t worry about the “great unwind” for the next few months.
There is always something to worry about. China’s real estate market is vulnerable and many feel that a bubble has formed. The government is imposing restrictions and real estate accounts for 10% of their GDP. Last week, the PBOC removed liquidity and that is also a concern. China will release industrial production, CPI and retail sales Sunday night. These numbers could be soft and that would set a negative tone Monday morning.
Economic conditions in Europe are dire. From my perspective, that is already priced in and any surprise favors the upside. Credit risk is also very low and I don’t see that changing. The EU will form a centralized banking authority and the ECB is printing money like mad.
The Beige Book will be released this afternoon and it should be good. Initial jobless claims and Challenger Gray & Christmas should be “market friendly” tomorrow. This will set a positive tone for the Unemployment Report Friday. The market has not rallied off of the ADP number and I believe there is still room to the upside.
The headwinds will blow as the S&P nears its all-time high. It is within striking distance and by the end of the week we should rest just below it. Monday’s price action could be a bit weak (China) and we will pull back to our current level.
I believe the breakout to a new all-time high will come as April earnings season draws closer. Evidence of an economic recovery will build and earnings estimates will be nudged higher
President Obama is meeting with Republicans and that is an encouraging sign. If we can get a budget passed, the market will have an easy path higher.
Global credit and a Chinese housing bubble are legitimate concerns. I do not believe that they will come to roost in the next two months. The market still has one more good push higher.
I have been buying calls and I have 25% of my normal position on. I don’t plan on adding until Monday. My strategy is based on time. The bid will strengthen over the next couple of weeks. After all of the economic news this week, I have all of the evidence I need.
I am also day trading after the market has established a 1-hour range. If we are above it I am buying strong stocks. If we are below the one hour range, I am shorting weak stocks. This approach has worked well and I have caught most of the major moves.
Stocks are trading in a very narrow range today. Dips will be brief and shallow. If the market gets a little overheated, you will see profit taking.
Use a controlled approach. Get long, but don’t overextend yourself. Look for opportunities to add. If you are long stocks that have made a nice run, take profits and look for the next trade.