Market Squall Ending – Buyers Are Lining Up – Next Leg Higher Starts Soon

Posted 9:30 AM ET - This week the market spent time backfilling. Stocks were a bit over-extended and profit-taking pushed the SPY down to the 50-day moving average. That support level was tested yesterday and it held. The FOMC statement next Wednesday will keep traders on edge. A rate hike is priced into the market. Inflation (price and wage) is tame and a balanced statement will lean towards two more rate hikes this year (dovish). The Fed has breathing room now that hourly wages have settled down. Economic data points (ISM manufacturing, ISM services, ADP and the Unemployment Report) have been strong. China's data (IP, retail sales and GDP) was also strong this week. During the beginning stages of an economic growth cycle the initial reaction to higher interest rates is negative. Fear subsides when economic growth is not hampered by higher interest rates. As long as inflation is moderate the market historically moves higher when the yield curve is upward sloping. 10-year U.S. Treasuries might reach 3% this year and that is low by historical standards. Corporate earnings are expected to rise 17% this year. Valuations are at the upper end of the range, but not in bubble territory. Stocks are still attractive relative to bonds and they will grow into these valuations. The market climbs a wall of worry and steel tariffs are taking the excuse for this week's pullback. Trump is using them as leverage to renegotiate trade deals. US products are heavily taxed when they are sold abroad and he is trying to level the playing field. Trump has already made concessions with a number of countries and this will not culminate in a full blown trade war. News outlets are always looking to justify every wiggle and jiggle. Stocks are little rich and bullish speculators needed to be shaken out. Prices are consolidating ahead of a likely rate hike – it’s that simple. Swing traders should stay long if the SPY closes above the 50-day moving average. This squall has almost past. Buyers are starting to nibble. The dips in the next few days will be brief and shallow. A dovish FOMC statement will fuel the next leg of the rally. Day traders need to watch for early weakness. If the market does not retrace in the first hour we will grind higher. The 50-day moving average was barely touched yesterday and stocks bounced immediately. That is a sign that buyers are lined up at that level. I will be trading from the long side today if we are above the first hour high. We can expect soft patches like the one we saw this week. I still like the longer-term backdrop from a technical and fundamental perspective. . .

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