Market Bid Will Gradually Improve – Use SPY $177.50 As a Guide. Obamacare Stats Could Be An Issue

November 12, 2013

The market surged to a new all-time high last week and it reversed sharply. Stocks did rebound on Friday, but bullish enthusiasm has been tempered. The S&P 500 sits just below an all-time high and it will take a breather for another day or two.

The ECB rate cut was a surprise and normally that news would have propelled stocks for many days. Some traders fear that deflation is worse than expected in the EU was forced to take immediate action. From my perspective, the news is bullish. Regardless of the reason, low interest rates are good for equities.

Global credit concerns are low. PIIGS yields are stable and the ECB has been proactive.

Yesterday, Fitch lowered Chicago’s debt rating by three notches. Their pension funds are extremely underfunded and the city does not have a game plan. The current environment is stable, but global/domestic credit concerns could flare up at any time.

Economic growth in China and Europe is improving. Official PMI’s came in better-than-expected.

Domestic economic growth is also on sound footing. In fact, it’s so good that many analysts are moving up there timetable for tapering. I’m not in that camp. I believe that Janet Yellen will take office and the debt ceiling will be extended before Fed bond purchases are reduced.

Earnings season has been decent. Corporate balance sheets are stronger than ever and companies are buying back shares. Profit margins are healthy due to cost-cutting and any uptick in demand will go right to the bottom line.

The news this week is very light and the market has lost its momentum. In a matter of days the bid should return and stocks will grind higher.

Obamacare is the only potential spoiler. The government will release application data this week. If it is extremely low and if many of the sign-ups are for Medicare, the market won’t like the news. This program could very quickly run up our deficits.

Asset Managers don’t want to miss a year-end rally and they don’t want to chase stocks at an all-time high. That means they will be relatively passive. If a dip presents itself, they will step in. If the market breaks out to a new high they will gradually add to positions.

I will use the same approach. If the SPY trades above $177.50, I will buy some December calls. If the market continues to rally after the breakout and it closes on the high of the day, I will add to the position. If I see decent volume and follow-through buying the next day I will complete the position. I won’t build to more than a third of my normal size.

On the other hand, if we get a pullback I will wait patiently for support. I don’t believe we will get is low as SPY $173 and I sense that buyers are close at hand. Once support is established, I will be more aggressive with my call purchases and I might build to half of my normal size.

Look for stocks that are in a strong uptrend and are breaking through horizontal resistance.

The market looks a little soft this morning, but I wouldn’t read too much into it. It looks like we will probe for support early in the day and the price action will be tame.
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