The Fed Filled the Punchbowl and the Market Surged To New Highs. Watch For Profit Taking

September 19, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market surged to an all-time high when the Fed decided not to taper. Janet Yellen will become the new Fed Chairman and that news leaked out. Ben Bernanke’s press conference after the FOMC statement was also dovish. Multiple bullish surprises resulted in a breakout and shorts ran for cover.

The S&P 500 has reached 1720 and that is close to the target I was looking for in October. Ideally, the Fed would have tapered and the market would’ve pulled back to the 100-day moving average. A move from that support to current levels would have presented a nice buying opportunity, but that scenario did not play out.

Now we are in “no man’s land”. I don’t believe Asset Managers will chase stocks at this level. There are speed bumps that still have to be navigated in coming weeks.

The Janet Yellen news was already priced in Monday. Larry Summers withdrew from the race Sunday night and that left her as the clear front runner. Janet Yellen’s economic forecasts have been accurate. She is an excellent communicator and that will provide clarity. However, her policies would not differ much from Larry Summers.

The Fed did not taper, but they will in the next month or two. That change in policy will keep a lid on the market and traders will be trying to guess when it will begin. It is a little concerning that the Fed still sees fragile economic conditions ahead.

Politicians have returned from recess and the debt ceiling rhetoric is heating up. We are only a few weeks away from the deadline and the U.S. Treasury will soon run out of money. Republicans want to delay Obamacare by a year and the President has labeled this as extortion. The “can” always gets kicked down the road at the last minute and the market will not panic until the deadline is upon us.

Asset Managers will not chase at all-time highs. There are still unresolved issues that need to play out in the next few weeks and I don’t believe anyone feels like they will miss a year-end rally. The S&P 500 has climbed 6% percent in the last few weeks and rising interest rates will provide a headwind.

I believe the market will do well to hold this level during the next week. I am long term bullish and I believe we will see a year-end rally. However, I can’t climb aboard at this level.

My strategy is to day trade from the short side. Because I am bullish on a longer-term basis, I will not hold overnight short positions. I am focusing on laggards (basic materials and retail) that have been dragged higher during this rally. These stocks will roll over if the market gives back some of the recent gains.

The calendar is fairly light. Next week we will get flash PMI’s. Good news is priced in and these releases should not disappoint.

The S&P 500 is trading in a very narrow range today. Stocks are overbought and we are due for a pullback. Watch for late day selling. If profit taking sets in, the SPY could drift back to the breakout at $171. If that level fails, bullish speculators will get flushed out and we could see continued selling.

Do not construe my statements as being bearish. I simply feel that good news is priced in and we might see some profit taking after a huge run up.
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