The market is in a good mood this morning. Here are some of my thoughts on the market.
- The market is anticipating another good earnings season and that is one of the main reason we have strength in the market.
- The fall in the dollar is probably another reason for market strength as it bolsters US earnings for muti-national companies and there is some affect of all assets increasing in value relative to the dollar.
- I find the strong retail sales in March quite revealing because it happened in the face of rising oil prices. It is an indication that maybe consumers can handle a little more higher prices than I had thought. I would like to see some more data points to confirm this view. I think one reason the market is not reacting to the higher oil prices is because of this data that consumers are still going strong in spite of rising oil prices.
- Oil is rising and is very close to hitting my $125 level on Brent which I thought would start hurting consumers. I still think oil is the biggest obstacle to the recovery. As oil continues to stay high it gives me more confidence that we will have a correction in May. The main reason oil prices are a threat is because they move very fast and the economy cannot adjust that fast.
- I think rising oil prices might force the fed to raise rates sooner than it wants. As long as the ECB was loose on monetary policy and the Euro seemed to be in trouble we had luxury to be very loose on monetary policy. Now that the whole world except Japan is moving towards tighter money the dollar becomes pretty vulnerable and so do commodity prices in dollar terms. At some point this might hurt economic growth and this is something the fed has to watch.
- Treasury rates are rising and I think they are rising in anticipation of a lot of interlinked factors that I have discussed above like higher economic growth, higher future inflation due to oil prices, falling dollar and prospect of higher fed funds rate.
So based on my thoughts above, my market view for the next few weeks remains that we could see some short term strength due to earnings and then we are setting up for a minor correction. From a trading perspective I think the risk/reward is better on the short side so my game plan is to wait and watch for market trend to change and add positions on the short side as we get further into April. I already have a 20% short position in June 137 puts from the s&p 1330 on April 1st as I had posted on this blog.