Color Me More Bullish

This commentary originally appeared on Real Money Pro on April 12.

NEW YORK ( Real Money) -- Last night I ended my trading diary with the following five reasons why I like the market action and why I expanded my long book on Wednesday.

  1. Market resiliency: Mr. Market bent but didn't break, despite every reason to collapse after Tuesday's horrible session. It wasn't strong enough to dissuade the newbie bears (many of whom were Muppet-like bulls at the top), and it wasn't weak enough to confirm some of their technical concerns.
  2. Growing skepticism: After a few weeks of market schmeissing (and a drop of about 60 points on the S&P 500), investors have grown skittish and uncertain. Market expectations have been tempered, and the profit bar might now be too low. These are necessary ingredients to an improving market and stronger foundation for the markets in the months ahead. Today's AAII survey results, in which bulls dropped from 38.2 to only 28.1 as bears rose from 27.8 to 41.6, confirm my view that sentiment has significantly eroded.
  3. Better domestic growth ahead: The Beige Book signaled an improving and sustainable growth trajectory -- all 12 Fed districts have reported what I would describe as grinding growth -- and the U.S. bond market weakened in conformation on Wednesday.
  4. Inflation is benign: The import price report underscored that inflation will likely be muted (a growth- and valuation-inflating factor). I expect some moderation in the March producer price index that is to be announced this morning.
  5. ECB strategy spelled out: A member of the ECB stated its intention to stand by and respond to any further evidence of growing debt contagion by supporting the purchase of Italian and Spanish bonds in the secondary market through its security markets program. This is precisely the manner in which the previous sovereign problems in Europe were addressed.

The overnight futures have had a positive tone, continuing yesterday's modest price momentum.

To me, the single most significant positive event for risk assets overnight (and what I like) was the strong follow through to the upside in China (up 1.8%). This is the third consecutive daily increase in the China markets, reflecting some renewed comfort in a soft landing based on a good March PMI, better loan numbers, improving auto sales and exports.

As well, while the World Bank trimmed its outlook for China's economic growth to 8.2% in 2012 and 8.6% in 2013, the report actually had a positive spin to it, as the organization cited the odds favoring a soft landing had improved.

Finally, the recent downfall of Bo Xilai is now being seen as possibly having a stabilizing influence on the economy in China as it could unify the ruling Communist Party ahead of a year-end transition in leadership.

At around 10:00 p.m. EDT tonight China's GDP, industrial production and retail sales will be released, and a bank RRR cut continues to be the subject of speculation in the markets.

Another market plus is that copper is up 1.3% in price (day over day).

Last night, Fed Vice Chairman Janet Yellin's speech was, not surprisingly, dovish (but didn't call for more quantitative easing), a neutral for risk assets. New York Fed President William Dudley also chimed in with the notion that "the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established."

This morning's economic data was on the soft side but not so weak as to unhinge the U.S. stock market.

A market pause remains a healthy event and is providing me with an opportunity to selectively add long exposure.

Overall, the economic data signifies a modest slowdown in the jobs expansion and a slight increase in pipeline inflation.

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