Late Day Selling Pattern Needs To End. Use That As A Guide. Stay Long.

October 15, 2012

Earnings season will kick into high gear this week. We’ve heard from major banks (JPM, WFC and C) and the results have been good. The financial sector has led the rally and we need to see a good reaction from this sector the next few days. Now that European credit concerns have subsided, bank stocks should be able to grind higher.

The tech sector has been beaten down because of warnings in the PC group. Worst case scenarios are priced in and two giants will release earnings after the close Tuesday. IBM and Intel will set the tone for the tech sector. I believe the news won’t be as bad as feared.

Two major issues have temporarily been resolved. European credit concerns have subsided and economic conditions in China have stabilized. Some of the world’s largest money managers are buying Spanish debt and yields have declined substantially. Last week, China increased fiscal spending and the PBOC provided a massive liquidity injection. They will do all they can to make sure the leadership change goes smoothly.

The one dark cloud that remains is the fiscal cliff. Politicians are in recess until the elections and nothing will happen until the middle of November. It is conceivable that this could go right down to the wire. Both parties want to push the date back, but they both feel they have the upper hand. The market is addicted to news and this issue needs to be resolved.

In today’s chart you can see that this rally was sparked by central bank headlines. They have fired all of their bullets and good news has to come from a new source. The economic news out of China this weekend was decent and fiscal spending/monetary easing will grease the wheels.

As earnings season unfolds, revenues will be light and guidance will be cautious. Asset Managers will buy dips, but they won’t chase stocks unless the fiscal cliff is postponed. Valuations are attractive and balance sheets are strong. Unlike 2008, companies are lean and mean. When revenues do recover, profits will go right to the bottom line.

In the next few weeks, Spain will formally request aid and Greece will secure its next payment. This will spark a rally in Europe. The market will jump on the news. Once the momentum stalls, stocks will gradually retreat.

The economic news this week is fairly light. Empire Manufacturing came in at -6 and that was worse than expected (-4). Retail sales rose .9% (including auto) and that was better than expected. The next major economic release will come next week when global flash PMI’s are released.

I still believe that earnings will be better than feared and I am expecting positive price action this week. SPY $143 should hold. The market has been selling off in the last hour of trading this month. This pattern needs to be broken. When I see stocks rally into the closing bell, I will know that a bounce is right around the corner.

I did not feel that the fiscal cliff would be an issue until the middle of November. The selling last week tells me that traders are concerned. Until the fiscal cliff gets pushed back, we won’t get the big rally I was looking for. We will have a few nice spikes (Europe and earnings), but there won’t be much follow-through.

The price action this morning feels positive. I would like to see the market grind higher all-day and finish strong. We need to convincingly bounce off of this support level. I am ready to allocate the last 25% of my portfolio, but I need to see strength. Fiscal cliff concerns will force me to take profits earlier than I would’ve liked.

Look for improving conditions and stay long.
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