Friday, February 01, 2013

It's The Reaction To The News That Counts

Despite some lower than expected economic reports this week, the market is powering to new highs this morning.  Great traders always say its the reaction in stocks to the news that counts more than the news itself.  On Wednesday when we got the weak GDP headline, a weak market would have plummeted.  But instead we saw a mild, orderly decline.  And today's jobs report came in below expectations which normal causes selling in stocks but instead we just saw the Dow hit 14,000 for the first time since 2007.  You can call it anything you want, but that's the type of action one sees in a bull market.

Although the payrolls report came in below expectations at 157,000 (vs. 180k consensus) the January ISM manuf. index rose to 53.1, which is nearly a one-year high in that index and points to stronger manufacturing activity.  There has been lots of chatter about corporations moving jobs back to the US and an upturn in the manufacturing sector. 

There were also strong ISM manuf reports in other parts of the world.  China rallied +1.4% overnight after its HSBC manuf. PMI rose to 52.3 from 51.9 previously.  And the PMI for the Eurozone rose to 47.9, above expectations.  While this is a better reading for the Eurozone area, the sub-50 figure still points to an overall contraction in economic activity in Europe.  Readings above 50 mark expansion.

I would have expected further selloff in bonds, but bond prices are up today pushing the yield on the 10-year down to 1.95%.

The volatility index is seeing a big plunge so far today, down -9% back below the 13 level.

Trading comment: We talked about bullish stampedes this week and how they often last 17-25 session with only 1-2 day pullbacks along the way, according to Raymond James.  So it isn't that surprising to see the market spike higher this morning after it's 2-day pause Wednesday and Thursday of this week.  But the market remains extended and still likely needs more consolidation.  We don't think that the first test of Dow 14,000 since 2007 will be successful.  It is more likely that we see some backing and filling before a second successful attempt.  We also don't want to chase stocks that are extended, and you can find lots of them.  From healthcare to industrials, many charts look unsustainable.  That doesn't mean you can't buy new positions in stocks that are breaking out, just be careful of chasing extended stocks that could be vulnerable to pullbacks.


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