Market Rally Is Stretched – Still Enough Gas To Get To SPY $170. Take Profits Ahead of the FOMC

September 11, 2013

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The market has rallied 3% in the last week and it is back above the 100-day moving average. It has also rallied back above horizontal resistance at SPY $167. President Obama will seek a diplomatic solution in Syria and that dark cloud has passed. This move is a little overextended, but I believe we have enough momentum to get to SPY $170.

Asset Managers have been buying ahead of a year-end rally, but they will be more passive now that we are near the all-time high. Furthermore, they will wait for the Fed’s decision next week.

Domestic economic conditions are strong and the sequester is behind us. In August, 169,000 jobs were created and that should be strong enough for the Fed to start tapering. They do not want interest rates to spike any higher and we should expect a small $10 billion reduction in bond purchases. It is important to remember that their monetary policy is still accommodative and the taper won’t hamper this market rally.

The initial reaction will be negative because it is the beginning of a new trend. The Fed still plans on carrying a huge balance sheet and the “great unwind” is years away. After the initial shock, the market will accept the Fed’s action.

Economic conditions are improving and we don’t need the “training wheels”. Corporations have maintained profit margins through cost-cutting and any revenue growth will go straight to the bottom line. Balance sheets are stronger than ever and companies are repurchasing shares.

Politicians are back from recess and the debt ceiling rhetoric will escalate. Republicans are likely to ask for a one-year delay in the Affordable Care Act. In return, they will vote to extend the debt ceiling.

This outcome seems plausible since President Obama has already delayed the rollout for corporations. Obamacare is very complex and businesses need time to evaluate/implement the program. In any case, the market won’t worry much about the debt ceiling until the 12th hour because the can always gets kicked down the road.

Seasonal weakness is winding down, Syria is somewhat resolved, the sequester is behind us and traders will gradually accept tapering. After next week’s FOMC statement, the market should have a clear path to a year-end rally.

I am still long calls and I am day trading from the long side. This rally still has a little more upside, but I will take profits before the FOMC.

I believe we will have a swift pullback after the Fed’s decision. I will wait for support and I will aggressively buy calls. If the market rallies on the news (unlikely), I am prepared to buy into strength.

After a nice run, the market feels a little tired today. We will test the downside and gradually grind our way back. Look for choppy trading with a positive bias the rest of the week.
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September 10, 2013
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