Buy Calls This Week. The SPY Should Challenge $167. Take Profits Ahead of the FOMC Next Week.

September 3, 2013

We made it through the summer doldrums and the calendar is full the next couple of weeks. A light round of profit taking flushed bullish speculators out of the market and stocks should find a nice bid this week.

I mentioned that I would be buying a handful of calls into the weekend and I did that Friday afternoon. Global PMI’s were stronger-than-expected and stocks in Asia and Europe rallied on the news.

Domestic economic releases should also be bullish this week. Initial jobless claims have not been this low since November 2007. ISM services, ISM manufacturing, ADP, the Beige Book, and the Unemployment Report will be released this week. We’ve had two good data points and activity is on the rise.

The market will accept higher interest rates if they are accompanied by economic growth. The FOMC will release its statement on September 18th and I am expecting them to taper. They do not want interest rates to spike any higher so the first move will be very small. It is important to remember that the Fed’s monetary policy is still accommodative.

Syria could be a small wrinkle this week, but the news will not have much of a market impact. Congress will approve an air strike and there will not be boots on the ground. This will simply be a warning that chemical warfare will not be tolerated. Any future use will result in additional airstrikes.

Politicians are returning from recess and the debt ceiling rhetoric will heat up. The can always gets kicked down the road at the last minute and the market won’t pay too much attention to the banter until we are right up on the deadline.

There were two big M&A deals today and that shows that companies are willing to spend some of their cash. Balance sheets are extremely healthy and companies are also buying back shares. Profit margins have been preserved through cost-cutting and any uptick in demand will go straight to the bottom line.

The market will not be off to the races, but I am expecting a grind higher this week. Stocks have pulled back from the opening high and there will be a little nervousness.

I will be buying call options this week and I expect the SPY to challenge $167. A week from now I will be taking profits ahead of the FOMC.

The Fed’s statement could spark selling. That dip should be brief and shallow and I will be more aggressive with my call purchases after the meeting. If the market rallies on the news, I am prepared to buy on strength.

Asset Managers will get more anxious with each passing week. They want to front run a year-end rally and the bid will strengthen.

Buy some calls this week but don’t get too aggressive.
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