Is There a Correction Coming?
2011 is starting off with a bang. Stocks are up big today. And the catalysts are coming from every angle. China's manufacturing index is expanding, despite measures to slow inflation, Bank of America (NYSE:BAC) settled some of its mortgage put-back exposure, oil is higher as growth expectations improve, price targets for Apple are higher, and China has said it will continue to buy Spanish debt.
Each of these news items I've listed addresses an important point of uncertainty. If China can grow its economy at the same time it attacks inflation, then the global economy continues to enjoy Chinese demand for raw materials. That's a clear benefit for resource economies like Australia and Canada, and even benefits American and German exports.
*****Bank of America's +$2 billion settlement with Fannie Mae and Freddie Mac for mortgage-backed securities puts a number on the outstanding risk for mortgage put-backs. You may recall that when this issue came to light, some estimated the worst-case exposure could be as high as $170 billion.
Bank of America has been the focus of the mortgage put-backs, but it's certainly not the only bank that could have exposure. So the fact that it's managed to put a number on this risk is good for the financial sector across the board.
*****Oil prices are perhaps the most pure indicator of economic growth expectations. Inventories and a rising U.S. dollar don't matter to oil prices when it looks as though growth will be better than expected.
And with Goldman Sachs out today with higher GDP estimates for the U.S. economy, it's no surprise that oil is higher. We should note, too, that even natural gas prices are higher today.
*****Good news for Apple (Nasdaq:AAPL) is good news for technology. At a time when PC sales are lagging, Apple's gadgets are picking up the slack. In fact, one could argue that Apple is leading a shift away from the PC to web-enabled products like the iPhone and iPad.
And given the relative value and convenience of these gadgets, there's a ton of upside for sales around the world.
*****Since China is a major source of growth for the world economy, investors pay intense attention to its every move. So when China says it will continue to buy Spanish bonds, despite the well-publicized debt issues, it's an important vote of confidence.
And we have to acknowledge China's savvy move here. It depends on the global economy every bit as much as the global economy depends on it. So when China goes right to the heart of problem and voices support for Spain, it's a good thing.
*****Now, investors are clearly looking at the bright side right now. In fact, they have been doing so for a few months. And while there can be no doubt that the economic situation has improved, there are still risks to growth.
Given that investors have been solely focused on the upside, it would seem likely that the next shift in sentiment will be toward recognizing risks, rather than further upside.
When will such a shift occur? Well, that is the big question. The S&P 500 is in the midst of a strong support/resistance zone between 1,260 and 1,280. With the S&P 500 approaching the upper end of that range, we could see some more serious selling soon.
As I've been saying for the last couple of days, have cash and wish-list of quality stocks ready...
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