Market Still Needs Time and A Catalyst. Keep Size Small Until Volume Returns

February 19, 2013

The market is still searching for a catalyst. China’s market reopened after a one-week holiday and global trading volumes should return to normal towards the end of the week.

The PBOC is removing liquidity and China’s stock market has declined 2% in the last two trading days. This is not a major concern. Retail sales in China were little soft and that weighed on their market as well. It will release its flash PMI Sunday night and that number should be bullish.

Italian elections should go as expected later this week and it will be a non-event. European credit concerns are low and the agreement to form a centralized banking authority will keep it that way. The ECB is printing money like mad and so is the BOJ (Bank of Japan). Global currencies are staging wild fluctuations and some of that will spill over to equity markets.

The US dollar has benefited from this money printing and it is good for equities and bad for gold. The S&P 500 is making a new five-year high is morning and it is within striking distance of the all-time high. Our Fed is also printing money, just not as fast.

The economic news is light the next few days, but that will pick up on Thursday. Initial jobless claims, the Philly Fed, LEI and flash PMI’s will be released. Job growth has been steady and initial claims declined last week. They are at their lowest level in five years.

Europe’s flash PMI will be weak, but conditions will show slight improvement. Last week’s decline in EU GDP cast a dark cloud on their market. Similar to the domestic decline in GDP during Q4 (-.1%), Europe’s conditions should be coming out of a trough.

Earnings season is winding down and the focus will shift to retailers on Thursday. Wal-Mart will post its results and the expectations are low. Retailers will be a “mixed bag”, but any surprise favors the upside.

It appears that the sequester will happen and the market is comfortable with it. As long as growth offsets the impact of the spending cuts, the market will move higher. A reduction in deficit spending is bullish on a long-term basis.

The best case scenario for the market is gradual growth. If conditions heat up too quickly, traders will start worrying about the “great unwind”. Interest rates will spike and you will have a new concern to deal with. As it stands, we are in a sweet spot.

Asset Managers want to buy on weakness and they probably won’t get the dip they are looking for. They pulled bids last week to gauge selling pressure and they didn’t see any. Bids were replenished and stocks finished the week higher.

The market is likely to trade in a tight range for a few weeks. It needs to gather strength so that it can challenge the all-time highs. The economic news this week should be decent and traders will monitor activity once the sequester is initiated.

Option implied volatilities are very low and you need to be a call buyer. Unfortunately, the market has lost some of its momentum and time decay will be an issue. Keep your positions small and wait for the volume to return. Look for stocks that are breaking out above horizontal resistance after posting strong earnings.

We are almost out of the doldrums and the price action will improve in a couple of days.
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February 15, 2013

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