Profit Taking Likely Ahead of the FOMC – 2 Additional Speed Bumps Ahead

Posted 9:50 AM ET - The price action is likely to be choppy until the FOMC next week. Rallies are met with profit-taking and dips attract buyers. Since the breakout to a new all-time high a couple of weeks ago, the price action has been very compressed. All of the economic releases last week (with the exception of the Unemployment Report) were extremely bullish. Domestic economic activity is strong and that will put upward pressure on interest rates. When the Fed ends its bond purchase program in October, the focus will immediately shift to tightening. Next week traders will be very focused on the phrase "considerable time". If removed, it will signal that the Fed's timetable for tightening has been moved up. Yields have been declining since the financial crash in 2009 and eventually, this trend will reverse. It will take time for the market to adjust. Emerging markets could take the biggest blow. They have benefited from low global interest rates and their credit risk is relatively high. If interest rates gradually move higher, we might only see a brief 10% correction. If yields spike higher, we could see a 20% correction. The magnitude and duration of the equity selloff will be tied to the bond market. Once we get through this adjustment period, the market will be able to recover as long as economic activity is strong. Even if the FOMC sticks with its previous rhetoric, interest rates will move higher on strong economic releases. Bond Managers will sell bonds knowing that tightening is right around the corner. Yesterday I mentioned that the debt ceiling and HMO premium hikes are potential speed bumps in the next month. September and October are seasonally weak months and I sense that resistance will build ahead of the FOMC. Apple will release its new products this afternoon. This could be a "sell the news" event. The news is light this week and there is not much to drive the market. I am not caring any overnight positions and I will be day trading from the short side. The price action yesterday was weak. If you are long calls, use SPY $199 as your stop. . .

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