It's Still All About the Banks
The market quickly ramped higher yesterday and volume was above average too. Over the past few months the market has steadily risen, but volume levels remained well below historical norms. The increase in volume was excellent to see yesterday. And that increase in volume added further conviction to the bullish move higher past 1280 resistance.
In addition to the added volume, the breakout past resistance was further bolstered by the financial index, which finished 2% higher for the session. Many people put a lot of emphasis on Alcoa (NYSE: AA) earnings yesterday as reason to be bullish, but the real bullish story was another day of outperformance by the financials.
The banks remain critical to this rally. And I will continue to remain bullish until I see them falter. The impressive performance this week by the banks has me bullish, although I think 1301 will be formidable near-term resistance. Additionally, the market is stretched after its December rally and a pullback is more than overdue.
In a normal market, that pullback would easily be contained by 1250 support (realistically, 1280 would not be broken). But it is earnings season, and our market leaders (the big banks) are on deck to report earnings. In earnings season big moves often happen overnight, and momentum may shift on a dime.
Nothing in the charts leads me to expect a devastating pullback. And I will continue to have a bullish bias until there is reason to be bearish. JPMorgan (NYSE: JPM) typically beats estimates and is known for candid guidance, which makes Friday a very important day for the indices.
In the weeks to follow, Bank of America (NYSE: BAC), Citi (NYSE: C), Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) will also report earnings. While I expect the bullish momentum will continue following the earnings announcements, we must be prepared to get bearish should the conditions change.
In the near term, until the support zone near1250 is lost, the bulls have the trend. For swing traders, 1197 is the number to watch.
I remain bullish, but I do expect mild consolidation ahead of Friday. Retail numbers come out on Thursday and the bears typically like to pounce on misses in that statistic. Additionally, German GDP contracted during the fourth quarter. As an export manufacturing powerhouse in Europe Germany benefited greatly with the weaker euro, and its economy was previously thought invincible. Numbers today showed that Germany contracted in the fourth quarter, and if Germany is weak the rest of Europe must be in trouble.
