The market has staged an impressive 3% rally in the last week. Stocks are challenging their all-time highs and the bid has returned. Asset Managers are preparing for a year-end rally and every dip from this point forward will be brief and shallow.
August and September are historically weak. This seasonal overhang is winding down.
The FOMC will meet next week and they are likely to taper. The market has braced itself for this new trend and the stimulus is no longer needed. Interest rates have spiked and the Fed does not want to spark another move higher. They will start gradually ($10 billion reduction in bond purchases). It is important to remember that they are still adding liquidity and that their monetary policy is accommodative.
President Obama will pursue a diplomatic solution to Syria. Progress will be slow and any possible air strike will be delayed for at least a couple of months. This is bullish news for the market.
Politicians have returned from recess. Debt ceiling rhetoric will escalate. The market will discount this event because the “can” always gets kicked down the road at the last minute.
Republicans want to push the Affordable Care Act back by a year. President Obama knows his healthcare program is extremely complex. He has already delayed the rollout for businesses. If Democrats agree, Republicans will extend the debt ceiling. This scenario seems likely.
These nagging issues will be resolved in a matter of weeks. Asset Managers are anxious to front run a year-end rally and they will aggressively start bidding for stocks.
Global economic conditions continue to improve. China and Europe have posted solid PMI’s for two straight months.
Domestic activity is on the rise. Jobs are being created and initial claims have fallen to their lowest level since November 2007. Last week, the big three automakers reported a 17% increase in auto sales during the month of August. They see strong demand this fall and they are on pace to sell 16 million cars this year (pre-crisis level).
Corporate profit margins are healthy due to cost-cutting. Cash flows are at record levels and they are using that money to buy back shares. Any uptick in demand will go straight to the bottom line.
The market is a little stretched after a 3% run. I believe we will hit resistance at SPY $170. The initial reaction to Fed tapering will be negative. Stocks should pull back to the 100-day moving average. Once support is established, I believe we will have an excellent buying opportunity.
I have been long calls for the last week and I will start scaling out of positions if this rally stalls. I want to be on the sidelines for next week’s FOMC.
If stocks rally on the news (unlikely), I am prepared to buy into strength.
The Fed is still accommodative and the market will learn to ride without “training wheels”. The first few days will be tenuous, but confidence will grow.
A great buying opportunity is right around the corner.