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It is a "key" week


Buckle up because this is going to be some week as some key economic and earnings news gets released. On the economics front, traders will have to grapple with forthcoming information on inventories, prices, production and sentiment. On the earnings front, traders and investors must take on news from just about every major company in every major sector, beginning with the semi-conductors and Intel (INTC) on Tuesday after the close. Watch out for the "key" events because there are going to be enough of them.

There is no question that the equity market is stronger than most expected after the release of what could only be called discouraging employment stats last Friday. The current news is bad, but the most recent Fed rate cut and upcoming economic stimulus package hold out hope that the fundamental backdrop may get better as we move through the year. Again, the markets are in a period where both the bull and bear case have valid points, yet neither can be proven right or wrong. That sets the stage for a trading range in the markets, where sentiment can shift pretty quickly given how the markets move into a news item and then what the news item actually is. At this juncture, the markets have had a nice move back to retest the early December highs, have become overbought and now need news that suggest the fundamental backdrop is improving enough to justify a significant move from current levels. That doesn't mean stocks as a whole can't move higher, it simply means that any rally above current levels could prove to be unsustainable unless there is some pretty positive economic and earnings news over the near-term. Good economic news seems hard to imagine given Friday's employment report, but the last three years have taught us anything is possible.

Again, in the twilight zone the market enters a trading range where at any given time it looks like the market may be poised to break down or break out depending on the news in the background. Remember a short couple of weeks ago when stocks were getting hit as Venezuela, Iraq and North Korea were dominating psychology? Despite the news and momentum at the time, stocks stopped going down and snapped back. Now we enter a period where potential tax cuts and stimulus dominate the tape and the direction clearly seems and feels higher. It seems to me that with all the head fakes that have taken place over the past couple months that it makes sense to wait for a move out of the trading range before getting very excited about the prospects for stocks. In my mind, the S&P 500, which most use as a barometer for the market is currently at the upper end of a trading range and has become overbought. That suggest chasing the upside from current levels may not make a lot of sense absent a break above trading range resistance on volume.

Remember that most strategists are looking for an up 5-10% year, which means that if they are right, then gains from current levels over the next 11.5 months should be limited to 0-5%. Do you think there might just a tad more volatility this year than that?!
Position SMH, SMH calls, SMH puts
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