If you’re waiting for the afternoon rally, you may want to go home.
The expectation that we will rally after Europe goes home is once again extremely high. Traders make the Pavlovian response of buying stocks as the closing bells ring in Europe because they have become conditioned to it. It seems to prevalent of a view, seems to have been front run, and today Europe wasn’t the problem. Well there were some problems out of Europe, but today we chose to ignore them.
Today’s weakness is largely our own doing. Never mind the ever-growing debt burden we are piling on and that the time between debt ceiling breaches is shrinking rapidly, but retail sales were bad. Not only were January sales far below expectations, but December’s disappointing numbers were ratcheted down as well.
The January sales figures are extra scary when you think about how good the weather was. I wrote about potential weather impact before NFP. David Rosenberg put out a great piece on just how good January’s weather was historically (not just when compared to last year’s heinous weather). Joe Brusuelas expects a great housing starts number on Thursday based on the great weather. I have to agree with him there, I would think we could see a huge number and would be waiting to fade that rally as fast as possible because everyone will quickly figure out after the fact that the estimates were too low because they weren’t taking into account the seasonal adjustment impact. But as a whole, that sets us up for some potentially weak economic data in February.
In the meantime, the market feels long and confident that stocks rally in the afternoon, and I see no reason for that to be the case today, if anything, I think we will see a new lows on the day before we close. Whatever the Europeans say about Greece, they are now scrambling to justify one more kick of the can, knowing that they are just buying time to create an “orderly” default. Why no time was spent on an orderly default or a fallback plan for Greece before now, we will never know, but every statement is basically confirming that is now the strategy. The PSI continues to confuse me, and I read somewhere, some Troika money is being allocated to pay interest due on bonds in March – why not PIK the bonds and pay the interest with the same new bonds? I really think the PSI negotiators are largely clueless and a more sensible package could have been put together in 3 days about 3 months ago.