During the last few weeks we’ve seen some profit taking and bullish speculators have been flushed out of positions. There are a number of factors that have been weighing on the market and they will all play out in a matter of weeks. With each passing day the bid will grow stronger and I am preparing for a year-end rally.
The US is likely to launch air strikes in Syria. Congress will vote on this in another week and the strategy will be approved. This is already priced into the market and it will be a buy the news event.
In two weeks the FOMC will meet. Most analysts now believe that the Fed will taper. Economic conditions continue to improve and the training wheels will come off. The first reduction in bond purchases will be gradual because the Fed does not want interest rates to spike more than they already have. It is important to remember that their monetary policy is still accommodative.
Politicians have returned from recess and the debt ceiling rhetoric will escalate in coming weeks. The market has a tendency to discount a default because the can historically gets kicked down the road at the last minute.
August and September are seasonally weak periods for the market. As October approaches, Asset Managers will get anxious. They want to front run a year-end rally and the bid will strengthen. This means any decline from this point forward will be brief and shallow.
Global PMI’s were stronger-than-expected in July and they continued to expand in August. Exports from China to Europe are growing and a recovery is underway.
Domestic economic conditions are very strong. All of the releases in the last two months have been bullish. ISM manufacturing came in much better than expected yesterday. This morning, ADP showed 175,000 jobs were created in the private sector in August and initial jobless claims fell by 9000. The four-week moving average is at its lowest level since November 2007.
The big three auto manufacturers reported sales increases of 17% and they are on pace to sell 16 million cars this year (pre-recession levels). Furthermore, CEOs said that the demand continues to be strong and the forecasts are bright.
In general, corporate profit margins are healthy due to cost-cutting. Any uptick in demand will go straight to the bottom line. Cash flows are at record levels and companies are buying back shares. There were two big M&A deals this week. Companies are also using cash to acquisitions.
We are on the brink of a great buying opportunity. The market still has to work off some of its nervousness, but that gives us time to scale into call positions.
I am currently day trading from the long side and I am looking for horizontal breakouts. I also have a small call position (20% of normal size). We should see a nice bounce this week on strong economic data. Syria and the FOMC will keep a lid on the market and I will take profits before the Fed meeting.
I am hoping for a pullback after the FOMC so that I can reload. I will be much more aggressive with my call purchases after their statement. If the reaction is positive I am prepared to buy into strength.
The summer doldrums are over and you should prepare for action. A great opportunity is less than a couple of weeks away.
Swing traders and start scaling into October call options. Know that you are early and you might take a little heat. Once the rally starts, it will be fast and furious.