After rallying for seven consecutive days, the market took a breather yesterday. Asset Managers are waiting for a pullback and they all want to buy that dip. That leads me to believe that we won’t get one.
Any money manager that is under-allocated will aggressively bid for stocks. They don’t want to miss this rally and they are playing catch-up. Bond yields are creeping higher and 10-year US Treasuries poked above 2% yesterday. Investors are selling bonds and buying stocks.
Credit concerns in Europe have subsided, growth in China is back on track, employment in the US is improving, bank balance sheets are strong, central banks are printing money like mad and DC extended the debt ceiling. Without question, risk is declining.
Asset Managers are in “risk on” mode and they are buying stocks. Option implied volatilities are near historic lows and confidence is running high.
Tomorrow will get GDP (1.3%) and ADP. Soft Q4 economic conditions will be trumped by private sector employment growth and many analysts feel that we are coming out of and economic trough. In the afternoon, the FOMC will release its statement. That could spark a little selling as traders anticipate the great “unwind” later this year.
Higher interest rates won’t be a problem for a long time if they are accompanied by economic growth. Yields are still near historic lows and a little move higher would be a healthy sign.
On Thursday, official PMI’s will be released. They will be consistent with the flash numbers last week. Conditions in China continue to improve and Europe seems to have bottomed. The market should like the news and there will be optimism heading into Friday’s Unemployment Report.
The earnings last night (STX, VMW, BMC and EMC) were not great. This theme will continue. Many analysts believe that this is an earnings trough and Asset Managers will plug their noses and buy. They will be attracted to strong balance sheets and cash flows. Any uptick in revenues will go straight to the bottom line as companies run lean and mean.
Look for stocks that are in a long-term uptrend and posted good earnings. In particular, I like to see horizontal breakouts to a new relative high on strong volume. Stocks like TRV fit the bill. It is testing the breakout and the next rally should be sustained. Use the Live Update table as your guide.
Buy calls and be prudent. If you get a nice run, take some chips off of the table. This is going to be a choppy move higher and the dips will be brief and shallow.
The market will be a little nervous today and Wed, but conditions will improve Thursday and Friday.