Temp Debt Ceiling Deal Priced In. Earnings Season Will Spark Buying – Add On Weakness
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Yesterday, the market pulled back on the open and support was established immediately. Buyers stepped in on the notion that a temporary debt ceiling extension would be passed and stocks finished in positive territory. The market wants to push higher and you should use this nervousness to buy dips.
Rumor has it that Republicans will extend the debt ceiling temporarily if the medical device tax is repealed and if income verification is added to Obamacare. This would clear the path for a rally and the SPY should be able to reach $175 in the next few weeks. The momentum will stall out as politicians vanish for holiday recess without a long term deal.
Earnings season has kicked off and financials have not been much of a drag. Intel will post results after the close. They have had some issues with their mobile chips and that might hurt performance. Last week, CTXS warned and that might be a red flag for the enterprise segment. PC sales have been soft and any surprise favors the upside. The news should have a slightly negative bias. Intel missed the mobile revolution and it is not the tech barometer it once was.
Other tech giants (AAPL, GOOG, NFLX, LNKD, FB, and AMZN) will get the ball rolling in the next two weeks. The real catalyst will come when cyclicals start to report. Economic conditions in Europe and China are improving and guidance should be encouraging. Today, Rio Tinto posted better-than-expected results and basic material stocks are rallying.
On Thursday, China will release retail sales, industrial production and GDP. The results should be market friendly.
Domestically, we are flying blind. We don’t have any economic reports because of the government shutdown. When they resume operations, the data will take a few weeks to settle in.
In general, corporate revenues will be flat and profits will increase slightly. Cash flows will hit record levels and buybacks will continue.
The Fed Is accommodative and they will not taper until 2014 when the debt ceiling is extended by a year. That timeline coincides with Janet Yellen taking over.
Asset Managers will buy in anticipation of a year-end rally. That means the bid is strong and any decline will be brief. Buy November calls on any weakness.
Support is at SPY $170 and that is a nice entry point. Once the market closes above SPY $171, we should be in a position to challenge the all-time high.
Ride your long positions and look for opportunities to add. I like defense and healthcare. As earnings season unfolds, I will rotate into cyclicals.