The second shoe is dropping today. Stocks tried to rebound yesterday, but the FOMC is weighing on the market.
Turkey raised interest rates by 5% and they are now over 12%. This dramatic move demonstrates the gravity of the situation. Fortunately, credit concerns are not spreading and PIIGs yields remain stable. I will constantly monitor this situation. If it changes, this decline could continue.
The FOMC will taper this afternoon and the market won’t like the news. In all likelihood, we will test the 100-day moving average (SPY $176.40). If the Fed did not intend to taper, it will be forced to now. Any hesitation would be a sign of weakness. US central bank monetary policy can’t be dictated by emerging market credit concerns.
Once the market probes the 100-day moving average, buyers will become interested. That support level has presented an excellent buying opportunity over the last 12 months. The news has not been bad.
Earnings have been decent and they are growing at a 7% clip. Cash flows are at record levels and guidance has been good.
Global economic conditions are stable. China is a little soft, but that weakness is offset by growth in Europe. The official PMI’s will be released early next week and they should calm nerves. A week from Friday, the Unemployment Report will be released. Initial jobless claims have been declining the last few weeks and I am expecting a good number. I’m also expecting a revision for December. These reports will restore confidence.
Politicians will extend the debt ceiling without much of a battle. Both parties want to stay out of the headlines.
I am not wasting my time on shorts. The better trade will come on the rebound.
Sift through the earnings reports and look for companies that grew the top and bottom line. I am not too worried about a small miss if the growth was good. Also look for positive guidance. If the stock is holding up well in this bearish setting, it will pop when the market finds support.
Option implied volatilities are elevated. That means that it is time to sell out of the money put credit spreads. This strategy takes advantage of time decay and rich premiums. Distance yourself from the action and sell spreads below major technical support. If that level is breached, buy back the spread.
There is a slight chance (5%) that the Fed will not taper. Initially, the market will love this news and we will get a sharp rally. If this happens, it will set-up an excellent shorting opportunity when the move stalls. This sugar high won’t last long and this should be a sign that the Fed is handcuffed.
Let’s focus on the most likely scenario. The Fed will taper and the market won’t like the news. The 100-day moving average will be tested and we should see a capitulation low within the next few days. Economic conditions will show moderate growth and Asset Managers will buy stocks. I am seeing some great bargains and this bounce should last more than a week.
Nimble traders will have some shorting opportunities; the price action will be very choppy.
Swing traders should stay in cash and they should spend their time monitoring earnings reports. Wait for the capitulation low and get ready to buy.