MONDAY:
Earnings continue, but the big event of the week is the FOMC meeting as investors look to see whether 'measured pace', eviscerated in the last statement, is removed altogether. We anticipate it will be taken out, and that is not necessarily because we think the Fed wants it out so it can raise rates. A couple of Fed governors have made it clear that it will need to come out in the event the Fed needs to lower rates. No one thinks the Fed will lower, but there is a cadre hoping (cannot call it anything else) that it will indicate that after this week's hike the Fed will go on sabbatical. Despite its protests to the contrary, the Fed has a pretty good idea what it is going to do heading into the meeting; why else would it carefully construct its statements, setting up the next step as it did in the last rate hike statement? The Fed is very conscious of giving direction to those watching, and its actions and statements construct a path to follow and even look ahead on.
In addition the employment report is out on Friday, and while losing significance after the election, it is still closely watched as an indication of economic health. It is not, at least no a leading one. The economy recovers long before employment does, and it turns down long before the jobs data indicate anything amiss. It is thus a much watched lagging indicator, but since it is closely watched it has market impact.
The Fed and what it says Tuesday as well as the action in oil prices will help guide the move that tried to get underway Friday. After a week of tennis volleys Friday had the look of some real traction after some support was undercut and a solid recovery ensued. The indices are still in downtrends, and in order to change the character and show the bigger money is back in and buying they need to produce a follow through session Wednesday or later to show the buyers are picking up where the short covering left off. Of course we also need to see the leaders taking off; there are still hold outs that have refused to crack in the selling, though many have broken down with the market. Any rally is only as good as the stronger stocks that are in good patterns and sport strong earnings.
We also need to remember about timing of events. There is a lot of talk now about a March slowdown and a continuing slowdown. There are recommendations to move out of cyclical stocks because the growth phase of the expansion is over. That presupposes a continued economic slowing. With the Fed raising rates still and oil still near $50/bbl that is not necessarily an outrageous supposition. The market looks well ahead of the present conditions, however, at least 6 months down the road and more like 9 months or more. Thus the market will turn before things look as if they are getting better, before this 'soft patch' shows that it is ending. That is why it is critical to watch the action of the market and the strong stocks to get the queue as to when it is really safe to start buying on the upside. If you wait until your fears are allayed then you have waited too long.
That is why we are looking for a follow through next week starting Wednesday to give us an indication that there is some upside ahead. The downtrend continues so we are not counting on it, but just watching for it. Unlike the last follow through where just SP600 made the move, we want to see SP500, NASDAQ, SP400, and any other index that can, show us a strong upside move on strong volume and great breadth Wednesday or later. That sets the stage for a further rally. It may not be the one that turns stocks back up to challenge the former highs at the start of the year, but would likely be a move we can make good money off of before it comes back to test the recent lows and set up a more sustainable bottom. |
