We are about to head into the all important earnings season next week. Alcoa will kick it off on Monday, 4/11. As is true of the last few earnings season the market is generally optimistic about good earnings and is staying strong. The economic data also for the most part continues to support an improving economy. My current view is that over the next 2-3 weeks the market should remain strong and may eclipse its old high and could run into the 1375 level. For the next few weeks I will also concentrate more on picking individual stock candidates as earnings might reveal some good/bad stories which might offer potential trades.
I think the market will peak sometime in the later part of April and then start a minor correction of around 7-10% as investors deal with uncertainty of ending QE2. One piece of data which might deter my view for this correction is if we start getting really good numbers on the employment front(I think this is low probability though) like a much stronger drop in unemployment claims or a very strong April Jobs report(300K+). Under such circumstances the market might believe strong jobs growth might counter the affect of ending QE2.
Here is my viewpoint on some of the important information released over the last 24hrs.
- Unemployment claims dropped to 382K again supporting a moderately improving employment picture
- Retail sales for march for most retailers came in better than expectations. This is pretty remarkable considering gas prices were already high at the beginning of March. The strength was notable at the high end retailers which should not be very surprising considering the wealth effect from rising stock prices.
- The ECB raised rates by 0.25%. This was widely expected so did not cause much of a move in the market. This is a reminder though that the era of easy money is probably slowly reversing.
- Portugal finally asked for bailout from the European Union and IMF. One thing of interest is that this time around the market is not reacting negatively to the European sovereign crisis as it did last year. It does make sense to me. The real economic impact from a slowdown in these small countries is actually negligible on the earnings of companies. The real fear of damage from these countries was if a default by them would really hurt the capital of some of the European banks in the larger countries. That would have been more damaging. Over the last 1 year the European union has come up with a bailout fund, the European bank stress tests have provided more information to the market about the actual exposure of the big European banks to these countries and probably over the last year the banks have reduced exposure to these weak countries. Since the bailout fund exists the chance of an outright default should still be years down the road. Considering all these factors the market is less worried about a contagion effect from these sovereign issues this time around. Another indication that the market is not worried is the behavior of the Euro. The Euro has held up really well in the face of these sovereign issues.
- Budget Battle – There is a possibility of a govt shutdown. I think if the market perceives that any shutdown will last for more than a few weeks that is when it will start reacting. This is something which needs to be monitored. I haven’t paid much attention to this issue but I think I should start.