The market is starting the week off on a quiet note, brace yourself for dull trading. We are in a news vacuum and the most exciting event this week is the State of the Union address Tuesday night.
China’s economic activity is improving and it is the global growth engine. Analysts are expecting GDP to eclipse 8% this year. The new regime will keep their foot on the gas pedal. Unfortunately, China’s market will NOT provide any impetus this week. They are closed to celebrate the New Year.
Official PMI’s in Europe rose to the best levels in 10 months. Conditions are still dismal, but at least the EU seems to have bottomed. The ECB is printing money and credit concerns have waned. PIIGS bond auctions have gone extremely well.
The job scene in the US is also improving. ADP reported that 192,000 new jobs were created in the private sector during the month of January. Challenger Gray & Christmas said that planned layoffs are down 25% year-over-year. ISM manufacturing and ISM services came in better than expected.
Earnings season is winding down. Revenues are flat and profits have been maintained through cost-cutting. Most analysts believe that this is an earnings trough so they are discounting current releases. Guidance for Q1 has been good.
Bond yields are near historic lows and stocks are attractively valued on a relative basis. Balance sheets and cash flows are strong. Any uptick in revenues will go straight to the bottom line as companies run lean and mean.
Asset Managers are anxious to buy a dip. This means we probably won’t get one. Last week, they pulled their bids so that they could gauge the selling pressure. They did not see any profit taking and the declines came on light volume. The market rebounded Tuesday and Thursday. In what seemed to be a negative week, the S&P 500 finished at a new five-year high.
Without any news to stand in the way, momentum should carry the market higher. Shorts won’t stand in the way and Asset Managers will get anxious.
The market is approaching an all-time high and the headwinds will blow. Don’t expect a runaway rally. I believe the price action will be good Monday and Tuesday, but we could see a little softness on Wednesday.
Democrats and Republicans will duke it out after the State of the Union address and that could spook investors. The sequester is still a few weeks away and the market will give politicians the benefit of the doubt.
Stocks should rebound from any selling and finished the week on a positive note. The market might be flat, but there is plenty of action within. Look for rotation.
I like stocks that have recently reported strong earnings and that initially pulled back on the news. Now that the market has digested the release, the bid is strengthening and the stock is breaking out through horizontal resistance on good volume. Buy calls and stick with the position as long as the stock has relative strength. When the move stalls out, take profits and look for the next trade.
I don’t see any major obstacles that will spoil this rally in the next few weeks.