This chart of the S&P 500 is all that matters:
After the bounce off of $75 (blue line in August), the S&P 500 has made a nice move to the upside confirming a trend of higher highs and higher lows. Expect profit taking next week at $85 but to see buying at the previous levels of $75-78 (20 day moving average orange line in August). We are assuming the pattern continues. If we get a break and a hold to 85, we will reluctantly* begin a new round of buying. If we get a pullback to 78, we will add to shares in our portfolio as planned with conviction. Updates to follow.
Here is what Jim Cramer had to say…
The markets rallied for the fifth consecutive week on the expectation of further global stimulus and slightly better than expected U.S. economic data. The cyclicals continued to lead the way, with energy, technology and materials as the leaders, and consumer staples and utilities were the laggards.
Since there was little activity out of Europe this week, investors turned to economic data from China, which continued to show slower growth across all areas — retail sales, industrial production and its July trade balance (which posted notable disappointing export orders). The good news is that China’s consumer price index and producer price index also came in lower than expected. This is a very important metric that the People’s Bank of China watches in order to decide on changes to its monetary policy, which we expect will happen. The question is when.
The U.S. data over the last few weeks have been a little better than expected — the purchasing managers index, housing data (both demand and lending), chain-store sales and jobs (both the nonfarm payrolls and initial claims). This suggests that a recession is less likely and that the “muddle through” scenario of GDP growth of 1% to 2% is now more likely. The debate now is about whether the Fed will take action as a result of the better data. At the very least, commentary from Chairman Bernanke has put a floor under the markets, meaning that if the data turn south, the Fed will act. But the real focus is on the European Central Bank’s potential policy changes as well as China, and we believe there will be action. September will be a very important month for the markets.
As a result of expected action and compelling valuations, we’ve been adding more cyclical exposure to the portfolio over the last month (and we added significantly last Thursday on the “Draghi disappointment”) and have put much of our cash to work. Our cash position is now 6%, down substantially from the double-digit level we had held since March.
Next week, the U.S. economic data will be front and center, with retail sales, producer price index, consumer price index, leading economic indicators, industrial production and both the Empire State and Philly Fed series. Also closely watched will be the earnings from Home Depot (HD:NYSE), Wal-Mart (WMT:NYSE), TJX (TJX:NYSE), Ross Stores (ROST:Nasdaq), Dollar Tree (DLTR:Nasdaq), Deere (DE:NYSE) and Cisco.
