Fed Gave the Market What It Wanted. Light Round of Profit Taking Will End – Bid Will Return

October 31, 2013

The market tried to push higher this week, but the progress was slow. Earnings season progressed nicely and I don’t see any speed bumps. Stocks will consolidate and gather strength. In a few days and the rally will resume.

The FOMC meeting yesterday sparked a light round of profit taking. The backdrop was already soft after the ADP report (130K new jobs). Once the selling began, Asset Managers pulled bids.

The Fed said that growth was moderate and that they plan to maintain their current level of bond purchases. This is exactly what the market wanted to hear. The news was good and stocks should rebound quickly

The Fed won’t taper until 2014 for a number of reasons. First of all, the economic data is tainted by the government shutdown and it will take weeks for the dust to settle. Secondly, the FOMC will wait for Janet Yellen to take office so that she can spearhead tapering. Finally, the debt ceiling lies ahead and the Fed will remain accommodative until it is extended by a year. This will provide a nice tailwind for the market.

Global credit concerns remain low. We have not had any flare-ups in the last year and this is very bullish for the market.

Economic conditions in China and Europe continue to improve. The flash PMI numbers were good a week ago and the official numbers will be released on Monday. They should be market friendly.

Domestic economic releases are in a “can’t lose” situation. If the numbers exceed expectations, the market will rally. If the numbers are soft, traders will give them a free pass and blame it on the government shutdown. Retail sales were better than expected this week. Initial claims, Chicago PMI and ISM manufacturing will be released today and tomorrow. Again, I don’t believe the market will react negatively if the numbers are soft.

Earnings season has peaked and the results have been good. Analysts are keeping their earnings forecasts intact for the S&P 500. Cyclical stocks are starting to catch a bid and the market needs a leadership change if it is going to move higher.

Balance sheets are stronger than ever and cash flows are at record levels. Companies are using that money to buy back shares.

End of month fund buying will lend support over the next few days. We are entering a seasonally bullish period and Asset Managers don’t want to miss a year-end rally. The bid is strong and that means the dips will be brief and shallow.

Interest rates have pulled back and the 10-Year is trading at 2.5%. That is below the dividend yield on the S&P 500 and stocks remain attractive investment alternative.

Politicians have kicked the debt ceiling “can” down the road and it won’t be an issue for at least a month. The meat of this rally will come in the next few weeks.

We bought when the SPY tested the 100-day moving average a few weeks ago and we were rewarded with an 8% rally. We took profits more than a week ago and we stayed on the sidelines to see if there might be a small reversal. The bid recovered quickly and we got back into long positions. I suggested taking one third of the normal position. That is what we have on right now. It has been a great run – don’t give back profits.

We are long from SPY $176. Our positions are slightly profitable. Be prepared to get out if we close below $176. I am not bearish, but I feel that bullish speculators could get flushed out at any time. If that happens, we will have a chance to reenter at a better level.

If the market holds this level, stick with your call positions. If not, exit and wait for a better opportunity. It won’t be long before the bid returns.

The macro backdrop is very bullish and we will have a nice rally.
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