The market has been in profit-taking mode since the FOMC decided to delay tapering. That blow-off top lured bullish speculators in and now they are getting flushed out of their positions. The continuing resolution (CR) is keeping buyers on the sideline.
Over the weekend the Senate will return a “clean bill” back to the House. I believe the House will attach some minor cut back (Obamacare for Congress and its staff) and send it back. The timeline is very tight and this is a minor battleground so it will get passed. The debt ceiling lies ahead and that is where most of the fighting will be waged.
Major economic releases will be market friendly next week. This should take some of the focus off of DC and buyers should start nibbling into the end of the month. Earnings season is only a couple of weeks away and there have not been many warnings. This should also attract buyers.
There isn’t enough bad news to spark bona fide selling. Asset Managers have simply pulled their bids until the CR is behind us. Light profit-taking and selling by bullish speculators is pushing the market lower on extremely light volume. I hope we get the “air pocket” I have been looking for.
I would much rather buy an intraday capitulation low near the 100-day moving average. I will get aggressive with my call buying if we see that level. On the other hand, if we gradually recover from here, my purchases will be smaller. I don’t like to chase.
All of the puzzle pieces are in place for a nice year-end rally once we get through the CR/debt ceiling. The Fed remains accommodative, Janet Yellen will become the next Fed Chairman, global economic activity is improving, corporate profit margins are healthy and cash flows are at record levels.
Let this light volume wave of selling run its course. I won’t buy calls until the SPY closes above $170.
If the market makes a new low for the day after a couple of hours of trading, I will day trade from the short side. Because of my bullish bias I will not hold overnight shorts.
The lower we go, the better the rebound. The CR will be resolved early next week and the bid will strengthen.