Investors Looking for Next Catalyst

Why was there not a rally on Thursday relative to the positive news? Are we ‘tired’ of good news? The Greek deal done with promises of cuts in spending for billions in loans to pay debt? Jobless claims were good again and improving. Apple gained 3.5% on the day to lead the NASDAQ 100 index higher. Banks settled with the states over the mortgage foreclosures. Bank of England agreed to leave rates low and pump more money into the European economy. That should have equated to a 1-2% gain in the broad market indexes, but all of the indexes were basically flat on the day. Are investors tired or are the markets ready to rest from a strong move higher since January 1st?

S&P 500 index is up 7.5%, NASDAQ is up 12.5% and the Russell 2000 is up 11.5%. Sounds like the rally is extended based on those gains. The key going forward for the broad market advance is improving economic data to support the outlook for growth. If that falters the markets can come down just as quickly as they went up. The markets may not be tired, but they do look a bit cautious.

Corporate profits would be the obvious assumption if the economic picture is improving, but the estimates looking forward for 2012 are not that impressive. Negative surprises for the fourth quarter being reported have seen the most negative since 2007-08. This shows weakness in the system. 26% of those reporting thus far have missed estimates. 63% have beat expectations or they are off about 10% according to S&P data. There is an anticipation of potential hurdles on the earnings front, versus a positive boost to stock prices.

Payroll tax holiday expires at the end of this month and that could bring our friends in Washington DC into play. If the process becomes another ugly issue for politicians the markets may react. Thus, it is another hurdle versus catalyst for the investors and the capital markets.

The labor markets, according to the data, is improving as the jobs report for January showed and the weekly jobless claims continue to improve. If the unemployment rate continues to fall and the outlook remains positive, it could provide a catalyst for the investment markets on the hopes of more works, more spending, more tax revenue and smaller deficits. Chalk one up on the catalyst side.

China’s economic picture is another data point to consider in looking for a catalyst. The numbers have been improving economically, but on they report higher than expected inflation data on Thursday at 4.5% increase in January. The policy easing by the government sparked more inflation than expected and thus raises a new issue for China. There trade data today reflected a bigger deficit, but there were excuses of holiday disruption. There is are almost as mnay concerns as opportunities for China to offer upside catalyst near term  I would put this on the worry side more than the catalyst side of the coin.

The challenge is plain and simple… a catalyst for growth is essential for the uptrend to continue. A pullback is expected from moves such as the one experience over the last seven weeks. The key will be a reason to buy on the dip. Essentially that is where the challenge lies. Finding the data combinations or growth opportunities that lead to a bounce off dip or test when it materializes.