Market Needs A Catalysts To Breakout. Debt Ceiling Extension Will Be the Key.

January 10, 2013

After consolidating for a few days, the market is trying to push higher. It is within striking distance of multi-year highs but it needs a catalyst to break out.

China’s trade numbers were much better than expected. Exports rose 14% when analysts were looking for a 5% increase. The new regime will keep its foot on the gas pedal and economic growth in China is expected to fuel global activity in 2013.

Spain held a successful bond auction overnight. The EU has agreed to a centralized banking authority and credit concerns are subdued. This dark cloud from year ago has temporarily parted.

Domestic economic releases have been stable. In December, 155,000 new jobs were added. Unfortunately, this is consistent with GDP growth of less than 2%.

Alcoa kicked off earnings season and the results were typical of what we might see in the next few weeks. Topline growth was flat and cost-cutting preserved profits. The guidance was optimistic on a long-term basis, but cautious for Q1. This theme will play out over earnings season.

Stock valuations are attractive at a forward P/E of 14. Balance sheets are strong and companies are lean and mean. Bond yields are at historic lows and Asset Managers are anxious to rotate out of fixed income and into equities. They will not chase stocks when they are close to a relative high unless they have reason to believe that conditions will improve.

Asset Managers want to evaluate earnings. The strongest companies tend to release early in the cycle. Wells Fargo will post results this Friday (they should be good due to the housing recovery), but most of the major banks don’t release until next Wednesday. Intel will post after the close one week from today and GE will announce a week from Friday. Strong results from the financial sector could spark buying.

The other missing piece of the puzzle is the debt ceiling. Asset Managers will be cautious during the negotiation. They want to evaluate the rhetoric and spending cuts. If the process gets ugly, Fitch has already warned that our credit rating might suffer. In the early going, the market will give politicians the benefit of the doubt just as it did for the fiscal cliff.

The market will tenuously creep higher and the debt ceiling will not be extended until the final hour. Stocks will decline and that will set up an excellent buying opportunity in February.

A watered-down solution will be reached and the market will rejoice. Taxes will not be raised much more and spending cuts will be postponed. The debt ceiling will be extended for two years and Democrats will have a blank check. This is bullish for the market in the first half of 2013. On a longer-term basis, our national debt spiral out of control.

The rally this morning is losing its steam and we need the other two pieces of the puzzle. The first few weeks of earnings season will not excite or alarm investors. Slow growth is the “new normal” and money will gradually flow into equities. When the debt ceiling is extended, we will get a nice rally.

Central banks around the world are printing money like mad and developed nations are running massive deficits. As long as everyone is doing it, no one seems to mind. As long as interest rates remain low, the market will rally.

There simply are not many attractive investment alternatives and for that reason alone, stocks will move higher.

Look for choppy price action with a bullish bias over the next few weeks. I am not expecting gangbuster guidance from any sector. Consequently, I do not believe we will have a big rally until the debt ceiling is extended.

I still like day trading this market.
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