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Last Thursday, the market surged to a new all-time high when the ECB made a surprise .25% rate cut. Soon after the open, stocks rolled over and the selling momentum increased throughout the day. Reversals like this typically follow through the next day. Surprisingly, the market rebounded on Friday and we are flirting with an all-time high this morning.
The price action the last two days has been strange. The overall news has been good and I have to assume the reversal was an attempt flush out bullish speculators.
The EU might be on of brink of deflation. The ECB has not taken action in the last year and this rate cut came suddenly. Some traders fear that the problem can be worse than it appears. Japan has been battling deflation for years and they have thrown the kitchen sink at the problem. The ECB might simply be trying to stay ahead of the curve.
The bottom line is that central banks are accommodative. That will provide a stiff tailwind for the stock market. Global credit concerns are low.
Politicians have kicked the debt ceiling can down the road. It won’t be an issue for at least a month.
Earnings season has been decent and analysts are maintaining their projections for the S&P 500. Corporate balance sheets are strong and companies are buying back stock.
US 10-year bond yields are below the dividend yield on the S&P 500. Stocks are attractively valued.
This is a seasonally bullish for stocks and Asset Managers don’t want to miss a year-end rally.
The wacky price action the last two days will settle down and the bid will gradually return. I am expecting a new all-time high this week.
If the SPY trades above $177.50 and the market grinds higher, I will buy some calls. If the market closes near its high of the day I will add to positions. If the market rallies the next day and the breakout has follow-through, I will buy more calls and complete the position. I will only trade one third of my normal size if this scenario plays out. I don’t want to take a lot of risks at an all-time high.
If the market pulls back, I will wait for support. I don’t believe we will get down as low as $173, but I would be a buyer at that level. I would also be more aggressive with my call buying because I will have a better entry point.
I’m still bullish. I believe we will rest early in the week and then grind higher. Look for opportunities to get long.