The market pulled back this week on tapering worries. A light round of profit taking forced bullish speculators out of their positions. We’ve hit a few of these air pockets in the last few months and each time the market has rebounded quickly.
That same pattern will repeat itself, but it might not happen before the FOMC next week. Congress will pass a budget and this potential storm cloud has parted. Many feel that this reduces uncertainty and it paves the way for tapering.
If the Fed postpones tapering, the market will jump higher on the news. The market will gradually grind back to its highs. I still feel this is the most likely scenario. Janet Yellen needs to take office and the debt ceiling needs to be extended.
If the Fed does taper, stocks will quickly dip and that selloff will lead to a fantastic buying opportunity. A reduction in bond purchases does not mean they will tighten. In fact, when they do decide to taper, they will probably lower the unemployment rate threshold for future rate hikes to 6.5%. That means the Fed’s zero interest rate policy (ZIRP) could be in effect until 2017. Tapering will be an economic vote of confidence by the Fed and it will be a “buy the news event” once technical support is established.
The budget deal signals a change. Republicans don’t want any bad press associated with a shutdown so they compromised. Similarly, they don’t want to be accused of holding Obamacare hostage so they will extend the debt ceiling without much of a battle. The GOP wants to let Obamacare implode and they will keep themselves out of the headlines. If they do this, they feel they can win the House and the Senate in 2014.
All of the economic releases have been bullish. Retail sales came in better-than-expected and flash PMI’s will be released Monday. Earnings season has ended and results were good.
Asset Managers are not worried that they will miss a year-end rally after a 25% run. They will not chase, but they will buy dips.
The action will dry up next week and we will be “dead till the Fed”.
The market traded higher overnight and the S&P futures were up eight points. That move was nothing more than a bounce. Traders are probing for support this morning and the damage should be contained.
Support at SPY $177.50 will hold. There is major horizontal support at SPY $175.
If stocks are able to claw their way back to positive territory, I will buy some calls. If the rally is sustained late in the day, I will add to positions. I will not allocate more than 20% of my normal size.
If the market continues to drift lower, I will stay sidelined. I would strongly discourage shorting this market. The potential for tapering is the only thing weighing on stocks right now and that event is not all that bearish. One encouraging statement in this light volume environment could spark a huge gap higher overnight.
Cheer on this decline from the sidelines. The lower we go, the better the buying opportunity. Ideally, the Fed will taper and the market will drop on the news. Then, we will have this monkey off of are back and we can prepare for a nice year-end run.
Be patient and focus on the long side.