Debt Ceiling Is Keeping Buyers On the Sideline. Bid Will Strengthen Next Week.

September 25, 2013

The market is still trying to work off some nervousness. Since the Fed’s decision not to taper, stocks have been selling off. Asset Managers have pulled bids and bullish speculators are getting flushed out. We will still have a few days of weakness, but prices will firm up next week.

The continuing resolution (CR) and the debt ceiling are weighing on the market. Both parties are polarized and ultimatums aren’t helping matters. The House approved a bill to extend the continuing resolution without funding for Obamacare. The Senate will reject this and send a “clean bill” back to the House on Monday. This volley could continue.

If Republicans want to win some credibility with voters, they should hold out and repeal the Congressional healthcare piece. If Obamacare is so great, they should all be on it. Americans are tired of politicians feathering their own nest.

DC will find a way to kick the can down the road. They could simply extend the debt ceiling every few months. Regardless, the market will discount the probability of a default. Both parties know that our credit rating would suffer if that happens.

All of the other puzzle pieces are in place for a year-end rally. Economic conditions in Europe and Asia are improving (flash PMI’s were better than expected). The Fed postponed tapering and they remain accommodative. Seasonal weakness is winding down and end of month/end of quarter fund buying should strengthen the bid next week.

Major economic releases are right around the corner (ISM manufacturing, ISM services, official PMI’s, ADP and the Unemployment Report). Domestic activity is on the rise and this news should take some of the focus away from the debt ceiling.

Earnings season is two weeks away and there have not been many warnings. This is a positive sign and the market typically rallies into earnings announcements.

Corporate profit margins are healthy and any uptick in demand will go straight to the bottom line. Cash flows are at record levels and corporations are using the proceeds to repurchase shares.

I am bullish and I am looking for an entry point for a year-end rally. If we do not hit an air pocket by Monday, the market will start to grind higher. Any dip will be brief.

I know I am early, but I will start buying November calls if the SPY closes above $170. I might take some heat along the way, but I will view any market decline as an opportunity, not a setback. I will keep my size very small until we see how the CR plays out.

We tested the downside early and the damage was contained. The market is likely to chop around.
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September 24, 2013
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