Default Avoided – Politicians Reach A Deal. Slight Profit Taking Then the Rally Resumes

October 17, 2013

Today’s comments were posted before the open.

A week ago, the market was spooked by the threat of default. It rebounded off of the 100-day moving average when a number of closed-door meetings were scheduled in DC. Asset Managers knew that an agreement would be reached and they bought stocks.

Republicans tried to use the debt ceiling as a bargaining chip and they didn’t have any leverage. The risks associated with default would have permanently scarred our nation’s credit worthiness.

We have a deal. The continuing resolution has been extended until January 15th and the debt ceiling has been pushed back to February 5th. This wrangling left a bad taste in everyone’s mouth and Republicans suffered a huge hit in the polls. The reward was small and income verification will be required for Obamacare subsidies. This is important, but negligible in the grand scheme of things.

The battle lines for the next round are already being drawn. Democrats are pushing for immigration reform and tax hikes (repeal the Bush tax credits and close corporate loopholes). Republicans will seek to reduce entitlement spending and Obamacare exceptions (1200 to special interests). They also want to reshuffle sequester cuts and they want the Keystone pipeline approved.

The deadlines have been pushed beyond the holiday season and that is bullish. Nothing gets done in Washington on a normal day and less is accomplished when Congress disappears during the holidays.

Stocks will breathe easy for a couple of months and the focus will shift to earnings. The news so far has been mixed. Financials have been weighed down by low trading volumes, legal expenses and reduced mortgage refi’s. Tech (Intel, IBM, Yahoo and eBay) have been soft. Last night, IBM blamed its miss on economic reform in China. Retailers are also reporting weak sales. Almost 20% of the S&P 500 companies have warned.

This negative tone will change in the next week when the tech darlings report (Amazon, Apple, Google, Facebook and Netflix). We will also hear from cyclicals and they could be the real drivers. Global conditions in China and the EU are improving and guidance should be encouraging. Corporate profit margins are healthy due to cost-cutting and any uptick in demand will go straight to the bottom line.

Domestic economic releases won’t stand in the way of this rally. We don’t have any data because of the government shutdown and it will take weeks for the dust to settle. The most recent reports were market friendly. If we do hit a speed bump, it will be blamed on the government shutdown and it will be viewed as temporary.

The Fed will remain accommodative through 2013. They will not taper until Janet Yellen takes over as the new Fed Chairman and the can is kicked down the road (the debt ceiling is extended 1 year).

Asset Managers have been buying and the bid is strong. They will continue to add and we will have a nice year-end rally. The SPY should be able to get to $175 in the next few weeks.

Republicans have been humbled and I don’t believe the next round of haggling will be as nasty. From a strategic standpoint, the GOP should be vocal, but they should not threaten default. If Obamacare turns out to be a disaster, Americans will use their vote in 2014 to change course. Republicans will hang on to the House and they will win the Senate. This is how the system is designed to work.

We bought November calls last week and we added to our position on dips. Monday and Tuesday we bought when the SPY tested support at $170. You should have a “full boat”, manage your profits.

We might see a little profit taking this morning, but support will be established early. The dips from this point forward should be very shallow – use them as a buying opportunity.

Look for a gradual grind higher the next few weeks. Focus on stocks that are in an uptrend and are breaking through horizontal resistance.
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October 16, 2013

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