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Yesterday the market pulled back on debt ceiling concerns and it gave us a chance to add to long positions. The SPY found support at $170 and this morning it has broken through resistance at $171. We should have a clear path to SPY $175 in coming weeks.
It’s all about the debt ceiling and rumor has it that a deal will be reached today. The Senate will draft a temporary extension and it will include income verification for Obamacare. John Boehner has tested the waters and he feels like he has enough support in the House. The Senate said they will not present the bill unless the Speaker the House agrees to put it up for vote. Supposedly, he has done so and that is why the market is pushing higher.
The GOP has taken a major hit in the polls and any additional haggling could cost them the House in 2014. They need to tread carefully.
This temporary deal will extend the CR into January and the debt ceiling into February. Thankfully, that spans the holiday season when nothing gets done.
During the next phase of negotiations, Democrats will try to reduce Bush tax credits and they will push for tax reform. Republicans will try to cut entitlement spending, they will try to delay the individual mandate for Obamacare and they will try to get the Keystone pipeline approved.
Fitch issued a credit warning last night and that has been ignored by the market. As I’ve been saying, I don’t believe domestic credit rating agencies are stupid enough to downgrade our debt. Politicians would be furious. Our borrowing costs would escalate and the wrath of DC would be unleashed. The witch hunt from 2009 continues and credit rating agencies are still in the crosshairs. If they downgrade US debt, their industry will be ripped apart by regulators.
Earnings season is starting to unfold. Intel posted soft numbers yesterday and the reaction was muted. It is not the tech bellwether it once was. Apple, Amazon, Netflix, Facebook and Google are the tech leaders and they will spark buying in the next couple of weeks. Financials have been decent and they are not weighing on the market.
The real earnings catalyst could be cyclicals. Rio Tinto posted better-than-expected results and economic conditions in China and Europe are improving. China will release industrial production, retail sales and GDP overnight. These companies will start reporting in a little more than a week and guidance will be critical.
Economic releases have been sparse because of the government shutdown. When they resume, they will be out of kilter for a few weeks.
We bought last week on the capitulation low and we have been adding on dips. You should have a “full boat” at this stage and you’ve had plenty of opportunities to get long. I don’t believe we will see any dips down to SPY $170. If you delayed, add to long positions if we test SPY $171.
I sense that a deal is close. If the scenario I outlined plays out, the market will rally into November. The Fed is accommodative and they will provide a tailwind the rest of the year.
Ride your profits. We loaded up on the pullback and now we are reaping the rewards.