FOMC Will Be Market Friendly. ADP a Bit Light. Stick With Your Calls – Stop At SPY $176

October 30, 2013

The market continues to push higher and Asset Managers are nibbling. We did not see much profit taking last week and they do not want to miss a year-end rally. End of month fund buying will lend support the rest of the week.

Retail sales were little better than expected yesterday. Apple pulled back slightly after earnings. These were two potential speed bumps. Stocks were able to add to gains and the SPY made a new high.

This morning, ADP said that 130,000 new jobs created in the private sector during the month of October. This number was in line, but it was a little light from my perspective. ADP processes payrolls for small and medium-size businesses. I consider their number to be more reliable then the government’s Unemployment Report (even in the absence of a shutdown).

From an economic growth standpoint, the ADP number is a little concerning. However, it is just one number. From a market perspective, traders will rationalize that the Fed will postpone tapering even longer.

The Fed is dovish and they will not taper until Janet Yellen takes office and the debt ceiling is extended by a year. Consequently, I don’t fall into the “bad news is good news” camp. We need to see stable economic growth if this rally is going to continue.

This afternoon the FOMC will release its statement. Their comments will be market friendly and stocks should push higher into the close.

Earnings season has peaked and the results have generally met expectations. Analysts are sticking to their EPS forecast for the S&P 500.

Corporate profit margins are healthy due to cost-cutting. Cash flows are at record levels and balance sheets are stronger than ever. Companies are using that cash to buy back shares.

Global economic conditions are gradually improving. The flash PMI’s a week ago were decent and official PMI’s will be released Monday.

The debt ceiling “can” has been kicked down the road and it should not weigh on the market for couple of months. Republicans were humbled after the last round of negotiations and they took a hit in the polls. If they don’t tread carefully, they could lose the House and the Senate in 2014.

Democrats want to shuffle the sequester cuts and Republicans seem willing to let them continue in its current state. That suggests that the GOP might have the upper hand. The GOP needs to stay away from Obamacare. The program seems poised to implode and Americans know where Republicans stand on the issue.

I mentioned this because the next round of debt ceiling negotiations will be critical towards year-end. I believe they will be less confrontational (no Obamacare repeal) and the market will be able to weather the storm. Time will tell.

We don’t have to worry about the debt ceiling or tapering for at least a month. Economic growth is stable and earnings are inching higher. This is a bullish backdrop and stocks will grind higher.

If you have been following my advice, you have a nice call position at this stage. I have a third of my normal position on. I locked in profits a week ago after a fantastic run and I don’t want to risk my gains. I also don’t want to chase. The FOMC statement should fuel a small rally today. I am not adding to my call positions, but I will day trade from the long side.

We have been getting long since the breakout at SPY $176. Use that as your stop. As the market grinds higher – raise your stop.
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