The market has been consolidating since the FOMC rally two weeks ago. Stocks pulled back and successfully tested the breakout. Now the market is waiting for the next catalyst and I believe we are a week away from positive price action.
The good news is mounting. ADP employment showed that 162,000 new jobs were created in the private sector. That was much better than expected, but ADP has been “running hot” the last few months. It has outpaced the Unemployment Report by about 46,000 jobs and the number did not spark much of a reaction. Initial jobless claims have been stable the last few weeks and I believe Friday’s number will be decent.
ISM manufacturing came in better than expected on Monday. Today, ISM services beat expectations by a wide margin (55.1 versus 52 expected). Economic conditions in the US are stable (if not improving).
Spain will formally request aid from the ECB. Germany and France want Greece to stay in the EU and they will get their next bailout payment. Both of these events will be positive for the market.
China is on a week long holiday and the news from Asia is light. China will appoint a new leader and there is a little uncertainty surrounding the selection. Once the announcement is made, their market will rebound. We can expect fiscal spending and monetary easing to follow. China wants to make sure the transition is smooth.
As long as European credit concerns are low, Asset Managers will remain in “risk on” mode. Bond yields are at historic lows and money will flow out of fixed income and into equities. Stock valuations are attractive and balance sheets have never been stronger. Earnings will be a little disappointing. Revenues will be light and guidance will be cautious. Corporations are lean and mean and any future uptick in revenues will go straight to the bottom line.
Congress is in recess until the election. I’m not expecting any developments on the fiscal cliff front. That won’t weigh on the market until mid-November.
The first presidential debate will be held tonight. I believe that traders have priced in an Obama victory since he is leading in almost every poll (even Fox News). If Romney fares well tonight, we might see a small rally tomorrow. If the debate favors Obama, the market will not have much of a reaction.
The FOMC minutes will be released tomorrow afternoon. Traders will be searching for comments related to the end of “Operation Twist” in January. Overall, the Fed is keeping its foot on the accelerator and I’m not expecting major news or a reaction.
Many analysts are looking for a 3% correction. That is when they plan to buy in to this rally. The longer we go without this pullback, the more nervous they will get. Asset Managers don’t want to miss a year and rally and the bid will grow stronger each day.
The market has been able to grind higher today. The news was good and I am expecting a nice contained rally. You should have your bullish candidates lined up, start scaling in.
Friday’s jobs report could spark buying, or it could come from earnings releases. In any case, once the next rally starts, Asset Managers scramble to catch up. Look for stocks that have consolidated in a tight range and are breaking out through horizontal resistance on strong volume. These stocks should be in an uptrend. IBM and AMGN are to examples of the pattern I’m looking for.
Start getting long.