SPY Will Bounce To the 100-day MA Before the November Elections

Posted 9:30 AM ET - Two weeks ago the S&P 500 breached the 200-day moving average. Since then it has tested this support level 3 times. A busy week of earnings releases should strengthen the bid and I'm expecting a nice bounce to the 100-day moving average. Overseas markets were strong overnight. China is considering tax cuts and stimulus programs. Italy's bonds were not downgraded to junk by Moody's and yields have retraced. Italy said it might consider reducing its deficit spending in 2019. The November elections are only two weeks away and Republicans are narrowing the gap in the House. Most analysts believe that they will retain control of the Senate and they might pick up an extra seat or two. I don't believe the market will move much before the elections. If Democrats control Congress the market will fall below the 200-day moving average. If Republicans maintain control of Congress the market will challenge the all-time high. If Republicans win the Senate and Democrats win the House, I believe the market will be relatively flat into year-end. Earnings season should be good. Valuations are reasonable at a forward P/E of 15.5 and there is room to run. This quarter will NOT be the issue. Companies have loaded up on Chinese inventory ahead of proposed tariffs. Domestic economic growth has been strong and profits should be excellent. I believe that Q4 earnings in January could be an issue. Tax cuts a year ago produced huge profits and the comparatives (earnings per share growth) will be harder to beat. Interest rate expenses are rising and input costs (labor, energy and tariffs) are increasing. Tariff related supply disruptions are also likely. These factors will weigh on profits. Companies should prepare for a prolonged trade war with China. Both sides are miles apart and neither side wants to negotiate. Swing traders bought the SPY at $278. We will hold without a stop. Our target is SPY $283. The selling pressure the last two weeks has been very heavy. If the market can't challenge the high by year-end it would be bearish omen for 2019. The leadership has been very narrow and we are not seeing broad-based participation from all sectors. Day traders should look for opportunities to get long. Shorts will be relatively passive into the earnings climax. Support at SPY $276.50 has been tested three times and it has held. Use that as your guide. Asset Managers will buy stocks now that they have a support level to lean on. Look for a nice bounce this week. . .

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