Flash PMIs Dampened Spirits. Market Will Test Downside. Wait For Support – Buy Dips

September 20, 2012

(Comments posted on the open). The market is consolidating after a huge run-up to last few weeks. I mentioned Wednesday that economic releases this morning would temporarily dampen spirits. The S&P 500 is down four points in early trading and traders were reminded that economic conditions are still fragile.

Europe’s flash PMI was worse than expected (45.9 versus expectations of 46.6). France’s manufacturing PMI fell to 42.6 and the services PMI was 46.1. Peripheral nations were also worse than expected. Manufacturing (47.3) and services (50.6) rebounded in Germany and that is a positive sign. Weak results were expected and stock markets in Europe are down slightly.

Spain held a bond auction and the results were good. Traders are not going to stand in the way of the ECB. Rhetoric between member nations has been constructive and the EU is forging a centralized banking system. Germany’s Prime Minister wants Greece to say in the union and negotiations for the next bailout are going well. Greece and the troika are only €2 billion apart and that is an improvement.

As long as European credit concerns remain low, the stock market will rally. Economic conditions in China are deteriorating, but they won’t be an issue during the next few weeks.

China’s flash reading for manufacturing PMI came in at 47.8. That was slightly higher than August (47.6), but it missed estimates (48.5). There were some signs of improvement, but stocks declined 2% overnight and their market is making multi-year lows.

The PBOC has been slow to react and some analysts feel that they fear inflation after the ECB/FOMC statements. China has been the growth engine for the world the last three years and it will take time for people to realize that they are headed for a hard landing.

The feud between China and Japan is escalating. Territorial rights to a tiny group of islands could result in economic sanctions against Japan. In the last three months, Japan’s export index has declined 6.4%.

The Fed is keeping its foot on the accelerator indefinitely. This won’t create new jobs, but it will provide a tailwind for the market. Initial jobless claims came in at 382,000 this morning and that was close to expectations.

The economic news next week is light. Q2 GDP and durable goods orders will be released. These numbers should not have a major impact on the market. The action will pick up after next week. Official PMI’s will be released October 1st and US economic releases will include ISM manufacturing/services, ADP employment, retail sales, FOMC minutes, ECB statement and the Unemployment Report. On Wednesday, October 3rd we will have the first presidential debate.

In three weeks, earnings season kicks off. We will get a sneak peek at the tech sector when Oracle posts results after the close today. I am expecting solid earnings and a few cautionary remarks. Transportation companies (FDX and NSC) have warned and that news is already factored in.

Stock valuations are attractive and balance sheets are strong. Bond yields are at historic lows and as long as European credit concerns remain low, money will shift out of fixed income and into equities. Asset Managers don’t want to miss a year-end rally and they will buy dips.

Politicians are scrambling to postpone the fiscal cliff and if they reach an agreement, this would spark another rally. Democrats might extend Bush tax credits if mandatory spending cuts are postpone by six months.

I believe the market will drift lower today. There are not any catalysts to push stocks higher and Asset Managers will pull bids. They want to see how far the market will drop before they step back in. I believe the declines will be brief and shallow. The breakout at SPY $143 should provide support. As we get closer to earning season, the bid will strengthen.

I’ve been advising you to take profits on big winners this week. Look for laggards that are breaking out to new highs on strong volume. Money will continue to flow out of safer stocks and into riskier ones. Wait for support and then start scaling into call positions.

The downside will be tested early this morning and we could hit a small air pocket. Later in the day prices will firm up and the market will recover some of the losses.

We are in for a lackluster week of trading. Spend this time finding bullish candidates.
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September 19, 2012
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