China Taps The Brakes Again

The markets are lower in early trading, showing that this market really has no memory from day to day. Yesterday's session turned out to be quite good, but that mood hardly lasted into today's session.

I think the biggest driver of sentiment today was the news that China's central bank will raise reserve requirements at banks for the second time this year. This comes on the heels of reports that China's banks issued stronger than forecast loan volume in January. With China being a main driver in the global economic recovery, monetary tightening from their central bank is a de facto tightening of our monetary policy as well. Or at least it has the same effect.

There was also a report out of Europe that GDP in the eurozone in Q4 grew less than expected. This, coupled with further talks of monetary aid to Greece, continues to pressure the euro and boost the dollar. While a firm dollar is good longer-term, in the short-term, it pressures commodity prices, weighs on energy and material stocks, and dampens growth for commodity-based emerging market economies.

The above reports are overshadowing news in the U.S. that retail sales grew more than expected, rising +0.5% in January.

Asian markets were mostly higher overnight; the 10-year yield is lower to 3.67%; and the VIX is +3.5% higher to 24.81 after a sharp move lower yesterday.

Trading comment: Well, after yesterday's rally we are no longer in oversold territory. That doesn't mean we can't rally further, just that we don't have the same tailwind behind us. The S&P 500 needs to close above 1166 to eke out a positive week, while the Nasdaq 100 is poised to put in its second consecutive positive week (+1.2%).

I continue to see more indications that bearish sentiment is reaching extreme levels, those that have been associated with past trading bottoms. As such, I think the time to sell and raise cash has passed, and the opportunity now is to look to add exposure on further weakness. With sentiment this negative, any catalyst could spark a nice rally, and I want to have my buy list ready. I would look to those names that have held up the best during the correction, as well as those that reported the strongest earnings in the latest quarter.