Comments were posted before the open. Yesterday, the market shrugged off early weakness and it climbed to new all-time highs. The volume was light indicating a low level of conviction. Asset Managers do not want to chase stocks at an all-time high. They don’t want to miss a year-end rally either so they are passively adding to positions.
A week ago, the ECB announced a surprise rate cut. Stocks shot higher and quickly reversed. The ECB has not taken action in more than a year and this sudden move might be a sign that deflation is an issue. Regardless of the reason, central bank easing is always bullish for equities and it took a few days for the market to come around.
Economic conditions in the US have been improving. ADP, retail sales, ISM manufacturing, ISM services, GDP and the Unemployment Report all came in better-than-expected. This round of good news has some traders calling for tapering in December. If the Fed reduces bond purchases because of strong economic growth, that is bullish. Sooner or later the training wheels have to come off.
I don’t believe the Fed will taper until 2014. Janet Yellen has to take office and the debt ceiling needs to be extended. I also believe the Fed will want to evaluate the impact of Obamacare.
Yesterday, we learned that only 106,000 people have enrolled in the ACA. This number was inflated because it included prospects who simply added a plan to their shopping cart, but they did not commit to purchase. Most of the enrollment was for Medicare (395,000) and that is much more expensive for taxpayers.
The government had projected 500,000 confirmed enrollees at this stage. The website is still down and it is doubtful they will meet the November 30th deadline. Furthermore, there are security issues and many applicants don’t want to compromise their personal information. If there are not enough enrollees, the costs will skyrocket. The sick and uninsured will flock to the program and health insurance companies originally based premiums on a broad mix of customers.
Americans that have gone through the process are finding that their premiums have increased and their deductibles are at least $2000 higher. I am using the lowest figures from polls I have read. If this sample turns out to be a true representation it will kill consumption. This is equivalent to a massive tax hike.
My comments barely scratch the surface. Obamacare could become a real issue in 2014 and we need to be mindful.
Healthcare represents 1/6 of our GDP and the wheels are coming off. Medicare is the largest contributor to our deficits and we currently spend $600 billion each year (25% of our budget). Medicare spending is projected by the Congressional Budget Office (CBO) to grow at a 5.8% rate through 2020. All of the sequester savings are dwarfed by these numbers.
With exception of Obamacare, the macro backdrop is very bullish. Global economic conditions continue to improve. Earnings season is winding down and analysts are maintaining their projections. Corporate balance sheets are stronger than ever and companies are using cash to buy back shares. Credit concerns are low and PIIGS yields are stable. US 10-Year bond yields are below the dividend yield on the S&P 500 and that makes stocks attractive. The debt ceiling won’t be an issue for another month and the Fed is not likely to taper until 2014.
This is a seasonally bullish period and we should see a nice grind higher. The headwinds are starting to blow and the majority of the move will take place in the next couple of weeks. As we get into December, the debt ceiling and tapering will keep a lid on the action.
On a dip, I would have been a fairly aggressive call buyer. We didn’t get one and I don’t like to chase. On yesterday’s breakout I got long, but I only traded 20% of my normal size. I am comfortable with this allocation and I don’t want to take big risks at this stage. If the SPY closes below $177.50, I will stop the trades out.
The momentum has slowed down dramatically and the volume is light. Until I see follow-through and conviction, I will keep my size small.
The market will try to push higher today. I believe we might still have 3% upside in the next few weeks. Look for stocks that are breaking through horizontal resistance and are in a strong uptrend.