Equity investors will receive information in three important areas over the next week, and two have been the driving force behind the stock market’s recent euphoria.
First, China will release its export data on Wednesday. Given the growth warnings officials communicated over the weekend, we should expect this to be a weak number.
The two additional catalysts are the European Central Bank and Donald Trump’s budget proposal.
The ECB meets on Thursday, and we are likely to hear about the increased levels of inflation that are being seen in the eurozone. The ECB has been cautious in reducing its bond-buying program and ending stimulus because inflation wasn’t yet at its objective, but now it is.
We are expecting a budget proposal from Trump on or around March 13, but this isn’t likely to add fuel to this rally. Quite the opposite: The best-case scenario is for a sell-the-news event, but if his budget proposal disappoints, it could be more material.
Our opinions are that the ECB won’t take action but will communicate that it will reduce its bond-buying program more rapidly if necessary, and we believe Trump’s budget proposal will disappoint investors following a rally of about 17% in the Dow Jones Industrial AverageDJIA, -0.14% since November in hopes of major fiscal reform.
Although only the fiscal reform and ECB influences have caused the euphoria that exists today, all three of these relatively immediate catalysts can impact the stock market, and all three have the potential to impact it negatively.
Be cautious with the SPDR S&P 500 ETF SPY, -0.30% PowerShares QQQ Trust QQQ, -0.17% SPDR Dow Jones Industrial Average ETF DIA, -0.15% and iShares Russell 2000 ETF IWM, -0.65% Stock Traders Daily has recently issued a number of short recommendations to take advantage of this risk.