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Market Likely to Trade Up a Bit Into Earnings Reporting Season


Lately the market has absorbed with remarkable aplomb some news that a year ago would have taken it lower.

All in all, it's been fairly quiet in the markets. My last post put resistance right around 1365 in the SPX, and the market sat right at it for a month, doing nothing, until the bank stress test results came out (hey, what year is this? 2009? For those new to the game, in March of 2009 the market took off once the original bank stress test results were released. If it worked once….)

The resolution to the Greece issue (forced compliance with Collective Action Clause (or CAC) and triggering of the credit default swaps led to very little turmoil in the stock markets. International Swaps and Derivatives Association (ruling body for CDS) determined on March 9 that Greece had defaulted and held an auction to determine the payouts on the insurance contracts on March 19.

Look at a chart of the SPX during that time -- do you see the big sell-off? Nope, me neither. The stock market absorbed it and moved on because finally ISDA was letting the CDS do what they were supposed to do. The world didn't end as some finance ministers in Europe had publicly worried about for months (How do they get those jobs anyway? Oh right, work in government or academia forever, not in the markets).

In addition, we have been getting some encouraging data points here at home. Unemployment has come down a bit (although there is much debate in the markets about whether it's all seasonal, or related to warm weather, or in low-paying jobs, at the end of the day, it looks a bit better).

Homebuilding seems to be picking up (Lennar (LEN) posted some good numbers recently). Banks are now talking about tailwinds from lower credit costs (credit costs are not only loan loss provisions, but also the cost of owning real estate they foreclosed on -- as both of these go down, earning can take off quickly). Apple (AAPL) can't keep its new iPads in stock. Tesla (TSLA) has a long waiting list for its new Model S (have you seen this car? Click here for a look at it on Tesla's website).

You can observe a lot by just watching.
-- Yogi Berra

Has the US economy turned? That's a hard call to make. While there's still plenty of homes underwater and families struggling with low-paying jobs and underwater mortgages, I think we're beginning to fight our way out here. On my walks around town, some commercial real estate that had been vacant for a long time is suddenly under lease, and restaurants seem to be plenty busy most nights of the week.

Retail that isn't essential is still weak, but that's not a bad thing -- how many pairs of jeans does one person need? How many Barbies are enough? Maybe if out of this recession Americans have learned to save a bit, focus on what's important in life (family, charity), and not spend every dime they make, plus 5% more, then we'll be OK in the long run. I'm betting on America long term, not against it.

Short term, however, there are a few potential problems to watch out for. By far and away the biggest issue is our overreaching federal government and its litany of regulations on every aspect of business. From reporting requirements to licensing (I recently learned that here in Oregon, you need to take 2,400 hours of class time to get a license to be a hairstylist. Are you kidding me?)

If one thing can bring down the entrepreneurial spirit in America and kill the recovery (and hence the stock market), its regulatory overreach. Dodd-Frank is 2,319 pages long. Apparently the 2,700 page healthcare law being debated in the Supreme Court is so long almost no one has read it. I own an organic pear orchard and vineyard, and the biggest time waster I have is the paperwork to be filed with the state and USDA.

Want to make a grown man cry? Have him do the paperwork for starting a business in most states in this country. Other issues mainly center on Europe – will Portugal be next to default (sorry, ask for a voluntary haircut on their debt)? Will Ireland, Spain, and maybe even Italy also ask for some debt forgiveness? Pandora's box has been unlocked – we'll probably get a good look at what's inside by summer.

Market Outlook: The SPX seems trapped in a little range here, bouncing between 1390 and 1420. I'm guessing (to say it's anything more than that would be to have more confidence in my outlook than I truly possess) that we trade up a bit into the earnings reporting season that will be starting in a few weeks. While it's always good to play defense and know your risk profile, lately the market has absorbed with remarkable aplomb some news that a year ago would have taken it lower.

This week's trading rules (with thanks to Phil Cuthbertson):
  • Stocks move on "better" or "worse," not good or bad. Presumably the market has already discounted good or bad. It is the second derivative that matters -- the rate of change.
  • Stop, listen, rethink.
  • Markets can behave irrationally for a longer duration than you can remain solvent.
S&P 500 (SPX) Support and Resistance Levels:
Support: 1403/1405, 1398, 1390/1392, then lots at 1375.
Resistance: 1411/1413, 1417/1418 then not much above that.

Editor's Note: For more from Jeffrey Miller, please visit Miller's Market Musings.
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No positions in stocks mentioned.
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