This Explains Why the Market Rallied This Week

Posted 9:30 AM ET - PRE-OPEN MARKET COMMENTS THURSDAY – The market is near the all-time high and gains will be hard fought from now until year end. Momentum and seasonal strength are keeping buyers engaged, but the FOMC meeting next week will temper the urge to buy near the all-time high. The big market rally Tuesday should have produced follow through yesterday and it did not. A daily chart reveals that when the downward sloping trend line has been breached to the upside after a major support level has been tested, we have seen heavy follow through buying and the market makes a new all-time high. This has been a reliable pattern in the last year and the lack of follow through this week would be a sign that resistance is building. Earnings season was excellent, but valuations are at 20-year highs. Real bond yields (interest rate less inflation) are falling farther into negative territory and that makes stocks attractive on a relative basis. The system is flush with cash and Asset Managers, retail investors and corporations (in the form of share buy backs) are using that cash to buy stocks. The last point is particularly interesting right now. In the last 5 years AAPL has repurchased 25% of its shares outstanding. Bank of America reported that its corporate clients bought back twice as many shares last week ($3.4B) as they did the week before and that is the highest level since March. They also reported that corporate buybacks accounted for half of the volume for all customers last week. This is why the market bid has remained so strong. The Fed is keeping interest rates artificially low so corporations issue cheap debt and they use the proceeds to buy back shares. Investors are forced to buy equities because bond yields don’t keep pace with inflation (negative real returns). There are fewer shares available and demand is increasing demand so the price goes up. Corporations are aggressively buying back shares ahead of tax reforms and that window will close December 10th for regulatory reasons according to Bank of America. The next FOMC meeting is on December 15th and it is an important one. We can expect tapering and that could cause some nervous jitters before the release. The Fed does NOT want to tighten, but they have removed the phrase “transitory inflation” from their statements. They have admitted that inflation is stronger than they expected and that the pace of tapering will be accelerated. Inflation will force their hand. Tomorrow the CPI will be released and a “hot” number could make investors nervous heading into the Fed meeting next week. Swing traders should manage their out of the money bullish put spreads. Your already opportunity was last week when the market tested support at the 50-day MA. At this stage I would not be adding to your long exposure. Day traders should watch for stacked green candles near the open. Down opens in an upward trending market is my favorite set-up. If the candles are mixed, be patient and use that time to find stocks with technical breakouts on heavy volume and watch for relative strength. When market support has been confirmed, buy these stocks. I believe that corporate buy backs will provide a strong bid through the week. The market held all of the gains from Tuesday and I believe we have another leg higher that will end Friday. That does NOT mean you should take a lot of overnight longs. The CPI due out Friday could be a speedbump. Any dip Friday will present a better entry point to get long and there is no reason to take that risk ahead of an inflation number. The range yesterday was a third of the normal range. If the candles are mixed and we stay in the first hour range, reduce your size and trade count. Support is at the low from Tuesday and resistance is at the high from Tuesday. . .

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