Market Bid Should Strengthen Throughout the Week. Fed Speak Will Be Benign. Stay Small – Use Stops
Comments were posted before the open. Yesterday, the market started the week off on a positive note and it quickly gave back the gains. The news is sparse, the volume is light and the market lacks a catalyst.
China’s economic reform provided a nice springboard but that move has run its course. Stocks in Asia were flat and Europe was down slightly.
Tonight, Ben Bernanke will provide an economic forecast at a speaking event. He wants to exit quietly and his remarks should be benign. I believe he will describe moderate economic growth and the need to continue accommodative monetary policy. The week will be filled with “Fed speak” and tomorrow the FOMC minutes will be released. A handful of analysts believe that the Fed will taper in December. That is not likely to happen, but hawkish comments could spook this light volume market.
The Fed will not taper until economic conditions strengthen. At this juncture, the numbers are distorted by the government shutdown. The FOMC should hand the reins over to Janet Yellen and the debt ceiling should be extended before bond purchases are reduced. The ECB just cut rates and that gives the Fed additional breathing room.
Earnings season is winding down. The news has generally been good. Retailers are posting mixed results and the expectations are low.
Economic growth has improved and the flash PMI’s should be market friendly on Thursday.
A couple of my leading indicators turned neutral. That is not overly concerning; it just means that the momentum is stalling. We saw a reversal off of a new high two weeks ago and we had another one yesterday. When these patterns start to stack up, it is a warning sign.
I’m not hitting the panic button yet, but I am maintaining a tight stop on my call positions (SPY $178). I did not buy more calls yesterday because the market reversed instantly. I have a relatively small position (20% of my normal size) and I will stick with it as long as the SPY stays above $178.
I mentioned yesterday that the first week of a five week option expiration cycle tends to be rather boring. Stocks will chop around and they should gradually push higher.
If I get shaken out of my call positions, I will wait patiently before reentering. As December approaches, the headwinds will stiffen. Holiday retail sales, the CR, the debt ceiling and Obamacare could spark profit taking.
We’ve had an excellent year and there is no reason to push it. I sense that Asset Managers feel the same way.
Keep your size small, focus on breakouts and use stops.
The price action will be choppy today, but the bid should improve throughout the week.