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FOMC Could Keep Buyers On the Sidelines. Soft Price Action Today and the Bid Will Return Friday.

Posted by Pete Stolcers on January 30, 2013

The market has established a pattern where it opens on the low and it closes on the high. That is very bullish and it is a sign strong demand.

This morning GDP came in a little light. Many analysts believe that we are in an economic trough and conditions will improve. Consequently, the miss did not have much of an impact.

ADP said that 192,000 jobs were added to the private sector in January. That was much better than expected and it bodes well for Friday’s Unemployment Report. Initial claims have declined to a five-year low and the expectations are high. Consensus estimates are for a 195,000 new jobs and I believe we will hit the number.

This afternoon the FOMC will release its statement. There will not be any major developments, but traders are worried about the great “unwind” that will take place later this year. It could spook the market and we might see a small decline this afternoon.

Interest rates have been moving higher, but I believe it is due to asset rotation. Investors are selling bonds and they are buying stocks. That is putting upward pressure on yields and US 10-year poked above 2% this week. We have a long way to go before interest rates become problematic.

Official PMI’s will be released Thursday evening and they should set a positive tone Friday morning. Europe’s activity is dismal, but it is at a ten-month high. China is back on track and GDP is expected to grow 8% this year.

Earnings have been consistent with expectations. Revenues are flat and profit margins have been maintained through cost-cutting. Most analysts believe that Q4 is an earnings trough and they are focusing on the future. Balance sheets are strong and stocks are attractively valued relative to bonds.

Asset Managers are hoping for a pullback, but I doubt they will get one. The market can stay overbought for long periods before it rolls over. Option implied volatilities are at historic lows and confidence is running high.

Central banks are printing money like mad and traders are in “risk on” mode.

After a little weakness today, I believe the market will continue to grind higher. All of the dark clouds have parted and shorts will not stand in the way of this freight train.

Look for a choppy grind higher. Buy stocks that are in an uptrend and have pulled back briefly or have consolidated for a couple of weeks. I like these plays when the bid returns. It the stock is breaking out above horizontal resistance on strong volume, it will run for at least a few days.

The market might be flat, but there is plenty of movement within.

Look for rotation and buy calls.
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