Take Profits On Call Positions. Don’t Get Greedy Ahead of the FOMC. Good News Is Priced In
The market is challenging the all-time high this morning. Larry Summers was considered President Obama’s front-runner to replace Fed Chairman Ben Bernanke. Yesterday, he withdrew from the race. Janet Yellen is the clear front runner and she is considered to be more “dovish”.
Before President Obama’s appointment can be voted on by Congress, it has to get approved by the Senate Banking Committee. Four Democrats have already voiced opposition against Larry Summers and he knew the resistance would be stiff. In his resignation letter he mentioned that this battle would not be in the best interest of the country.
Janet Yellen is already on the Federal Reserve Board and she knows the current game plan. Her economic forecasts have been spot on and she has excellent communication skills.
This was one of the dark clouds the market had to navigate this week. President Obama was likely to reveal his choice Thursday or Friday after the FOMC meeting. The market would not have liked his selection and that was one of the reasons I thought we might pullback.
We still have to get through the FOMC meeting. The Fed will taper and that is a big deal since it marks a change of direction. If bond purchases are reduced by more than $10 billion, the market will have a negative reaction. I still believe we could see a swift decline even if the taper is $10 billion.
The market has rallied 4% in a little more than a week. Asset Managers will not chase stocks at an all-time high. They will wait for the Fed’s decision.
Seasonal weakness is winding down and air strikes in Syria have been canceled. The debt ceiling looms, but Republicans are likely to extend it if Democrats roll back Obamacare. This outcome seems likely since many of the details have not been ironed out. The implementation will be difficult and there are many unanswered questions.
Global economic conditions continue to improve. Corporate profit margins are healthy and any uptick in demand will go straight to the bottom line.
We are set up for a nice year-end rally. I took profits on some of my call positions Friday and I am selling out of the rest this morning. I don’t want to be greedy.
I will be day trading from the short side. In particular I want to take bearish positions on laggards that have recently bounced and ran out of steam. Basic materials and retail are two groups I will focus on.
Do not construe my comments as being bearish. I AM BULLISH. I am a day trading and I will not take overnight bearish positions.
I am simply trying to take some money off the table and I am looking for a better entry point for longs. All of the good news is priced in.
If you are a swing trader, take profits on bullish positions and go to the sidelines. I believe you will have an opportunity to re-enter at a better level after the FOMC.
I will be watching for signs of weakness today and I will be day trading from the short side. If stocks continue to grind higher I will sit this one out.