After a huge rally to new multi-year highs, the market is taking a breather. Asset Managers are nibbling when the market pulls back and traders are taking profits on strength. The news is very light this week and we are likely to see consolidation within a range as earnings season kicks off.
Traders want to see if bank stocks still have some gas in the tank. Wells Fargo and J.P. Morgan Chase will post numbers this Friday. The financial sector has surged the last few months. There have not been any warnings from this sector and the outlook is positive. European credit concerns have subsided and I believe banks will be able to grind higher.
Tech stocks have been beaten down. Apple, IBM, Intel and Google will post results next week. I believe these leaders will calm nerves and the sector will rebound. Asset Managers are anxious to buy laggards. Dismal guidance is priced in and any surprise favors the upside.
The economic releases last week were positive (ISM services, ISM manufacturing, factory output, ADP, and the Unemployment Report). Growth has stabilized in the US and that will provide a positive backdrop for the market.
Large Asset Managers (like PIMCO) are buying Spanish debt. They know that the ECB is backstopping them and they are attracted to the yield. Interest rates in Spain stabilized and traders are expecting them to formally request aid in the next few weeks. Germany and France want Greece to remain in the EU and they will get their next payment. European credit concerns won’t flare up in 2012.
China will appoint a new leader in coming weeks. They will launch fiscal spending programs and the PBOC will ease. This will “grease the wheels” and they want to make sure this leadership change goes smoothly.
Given these positive influences, I can’t envision a major market decline. Any pullback will represent a buying opportunity. Corporate revenues might be light and the guidance is likely to be cautious. However, stock valuations are attractive. Companies are lean and mean and Asset Managers know that any uptick in revenues will go straight to the bottom line. With bond yields at historic lows, money will rotate out of fixed income and into equities.
You’ve heard the same theme from me during the last few weeks and I’m sticking to my forecast. The last two times that European credit concerns subsided, the market staged a sustained rally over a period of months.
Traders are little nervous ahead of earnings and Asset Managers are waiting for a dip. The releases will crank up next week. Some of the uncertainty will dissipate and Asset Managers will get nervous when they don’t get a pullback. They don’t want to miss a year-end rally and they will aggressively bid for stocks.
I have three quarters of my risk exposure on at this time. I will add next week after I see the reaction to tech earnings. I believe this sector has room to run and I want to buy on strength.
The market has declined in the last hour of trading the last two weeks and this pattern needs to be broken. I would like to see stocks open on their lows and close on their highs.
Look for opportunities to get long.