Looks like the economic recovery is on stronger ground than the recent market sell-off would have you believe. While all traders have good calls and bad ones, my call for an end to the sell-off last week in my recent article timed the market correctly. The question now is: What's next?
While obviously markets can be very unpredictable short-term, I think are three strong signs that the market will continue to rally.
First, the recent earnings reports and technical strength of one of the market's strongest leadership sectors, the financials, was not highlighted as much by media because of the recent sell-off.
First, both Citigroup (C) and JP Morgan (JPM) reported strong credit volume growth of nearly 10% in the fourth quarter, up from a growth number of around 6.5% in the third quarter, and both banks reported a nearly 10% in credit card volume as well. While many of the big banks had strong consumer spending reports in the third quarter, these results were ahead of expectations.
Given the U.S. economy still derives around two-thirds of its GDP from consumer spending, this news also suggests the recently disappointing jobs data may be misleading or more seasonal than previously thought.
Technically, Citigroup and JP Morgan have held their recent support levels despite the sell-off in Citi at the end of the week.
Even with Citi's sell-off to below $34 a share, the stock is still trading comfortably above the $32.50 level that was resistance prior to the breakout of the financial stocks after stress test results were released.
Second, and equally importantly, the data in China has turned markedly positive with good housing and trade information coming out, and some shipping companies becoming bullish on rates for the first time in over a year.
The U.S. market has often been alone in leading equity markets higher with Europe debt and economic problems, and the weakness in China. If China and Asian market can rally these markets could provide new leadership to take the markets higher even if U.S. markets consolidate for some time.
Chinese equities have begun to outperform their Western counterparts for the first time in many months as well. Let's look at the chart.
As we can see, for the first time in nearly six months, Asia is starting to move higher even while U.S. stocks continue to consolidate.
Finally, the last reason I continue to think the market will move higher next week is the strength of momentum that have been important leaders during the now six month rally. The most important leaders to me would include Apple (AAPL), Baidu (BIDU), Mastercard (MA), and Visa (V).
With the exception of Apple, all three are less than 2% off their three month highs despite the near 5% pullback in the major indexes like the S&P 500 and its tracking exchange traded fund SPY (SPY). Apple is also still up over 35% this year alone, and is by far the best performing stock of the four this year.
Let's look at the chart.
As we can see, some of the market's key momentum names have all performed markedly better than the S&P 500 during the recent rally with the exception of Apple. Given that Apple is still up more than any of these names so far this year, the company's recent relative underperformance is less notable to me.
So, while financials and technology stocks have led the rally, the financials have been the most important sector to watch in my opinion since they are more tied to consumer spending and European credit issues than any other sector in the market. While anything can happen in one week, sometimes recent price action is the best predictor of near-term moves in the market.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BIDU over the next 72 hours.