Posted at 10:00 AM ET – Last week, the market breached the 100-day moving average and the SPY tested major support at $173.60. It successfully retested that level on Wednesday and buyers stepped in immediately. That marked the capitulation low.
Bullish speculators were flushed out and bearish speculators got short on that dip. Asset Managers have been waiting patiently and they stepped back in after a solid ADP report. The price action Thursday and Friday was very bullish and we are back above the 100-day moving average.
The magnitude of this bounce will determine if the intermediate term trend is weakening. A wimpy rally that can’t penetrate SPY $181.50 would be bearish. I expect that resistance level to be tested this week. If the market easily gets above that level it will be a sign that buyers are still engaged.
I don’t see any speed bumps this week and we will get a very clean look at the price action. The economic releases are light, earnings season is winding down and central banks are not scheduled to meet.
We have officially reached the debt ceiling. Congress will be in recess after Wednesday and they will not return until February 22nd. They will try to get a deal done this week, but it is unlikely.
The Senate wants a clean bill and the House wants to attach minor provisions (restore military benefits and/or approve the Keystone Pipeline). These demands are relatively minor, but they are important to voters. The GOP will use them to make a political statement. Ultimately, the debt ceiling will be extended by a year. Unfortunately, the volley back and forth makes approval this week unlikely.
When the debt ceiling is extended, the market will rally. This will remove uncertainty.
Last year, it was easy to buy at the 100-day moving average. Central banks were printing money and economic conditions were stable. Each of those pullbacks resulted in a snapback rally and the market jumped to a new relative high. I don’t believe we will see that slingshot this time around.
The Fed is tapering and credit conditions are tightening. Hedge funds are adjusting risk and emerging markets are experiencing currency fluctuations. If global economic conditions were expanding, this adjustment phase would be brief and relatively painless. Unfortunately, economic activity is sluggish.
Job growth in the US is soft. Some of that weakness can be attributed to bad weather, but there could be other factors at play. China’s growth is starting to slip and the economic recovery in Europe is tenuous.
Obamacare will weigh on the market this summer. It is impacting employment decisions and middle-class Americans will have to pay $2-$3000 more for insurance. This will impact consumption.
Stocks typically rally in January and it is historically one of the strongest months of the year. This anomaly failed to materialize and it served as a warning sign.
This bounce still has some gas in the tank and we should be able to challenge resistance at SPY $181.50. When the debt ceiling is extended we will get the final push higher.
Global economic releases from now until the debt ceiling extension will play an important role. Flash PMI’s will be released next week and I plan to be out of my long positions by then.
We will get a clear picture of the underlying strength of this rally this week. I expect to see a grind higher and I have moved my stop up to SPY $179 (closing basis). I do not want to give back huge profits.
The next FOMC meeting on March 15th could spell trouble.