China Posts Strong Growth. Earnings Reaction Generally Positive – Good Sample Today.

January 18, 2013

Yesterday, the SPY rallied to a new five-year high on good volume. The economic releases have been good and earnings have been decent.

Employment is the key to an economic recovery and initial jobless claims declined 37,000 yesterday. Residential construction spending increased by 12% and that was better than expected. Domestic activity has been stable and it might be improving slightly. There are not many releases slated next week.

China’s economic releases were posted overnight. Industrial production, retail sales and GDP (7.9%) all exceeded expectations. Analysts are raising China’s growth forecasts for 2013. It is once again in the spotlight and it is the cornerstone for global economic activity.

European credit concerns are subdued. The EU has agreed to a centralized banking authority and PIIGS bond auctions have gone well. This was a major dark cloud in 2012 and it kept a lid on the market. Central banks around the world are printing money like mad and that will provide a tailwind for stocks.

The debt ceiling extension will go down to the wire, but Republicans will eventually cave-in. Their political voice has been weakened and they are in damage control mode. The market is pricing in a deal.

The macro backdrop is bullish. From a micro standpoint, revenues and earnings will be flat. Normally, this would not entice investors. However, bond yields are at historic lows and stocks represent an attractive investment alternative.

Corporate balance sheets are solid and cash flows are strong. Companies are lean and mean and any uptick in revenues will go right to the bottom line.

Asset Managers are anxious to rotate money out of fixed income and into equities. First, they want to gauge earnings and guidance. With each passing day the bid will strengthen. They will plug their nose and buy stocks. Not because of growth, but because of a lack of investment alternatives.

I expect to see some volatility next week. We got a good sampling from many different sectors in the last two days and the reaction has been generally positive.

I bought calls yesterday and I plan to add this morning. I am keeping my size small. The market will probe for support early and it should grind higher later in the day. Next week, I will add to my positions when I see weakness.

The market should grind higher into the beginning of February. As we get closer to the debt ceiling deadline, I will take profits. The market is a little too optimistic about the extension and there is room for disappointment. Any decline will present an excellent buying opportunity.

Ultimately, the debt ceiling will be extended and the “can” will get kicked down the road. Once that happens, the market will rally.

Look for opportunities to get long and gradually scale in.
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