US Reaction To Chem Warfare Weighing On the Market. SPY $163 Will Be Tested

August 27, 2013

Yesterday, the market rallied and the price action was bullish until Secretary of State John Kerry spoke. He said that the US will not tolerate chemical warfare and it is carefully weighing its options in Syria. This news sparked a round of selling and that pressure is plaguing the market this morning. The S&P 500 is down 17 points before the open.

It is important to remember that trading volumes are extremely light. We are in a news vacuum for another week and this latest piece of information will influence trading.

There are many nagging issues like this that will be resolved in the next month. Once they are behind us, an excellent buying opportunity will present itself.

Americans do not want to get involved in another conflict. In Syria, we won’t support an oppressive leader willing to kill his own citizens and we won’t support rebels that are led by Al Qaeda. I believe we will limit our involvement to a handful of airstrikes just as we did in Libya. By no means will we put boots on the ground. If this is our course of action, the market will rebound.

We are also hearing that the Treasury will run out of money in mid-October. We already knew that and it is not news. It is merely a reminder that the debt ceiling will be an issue when politicians return from recess. As always, they will figure out a way to kick the can down the road.

Japan is considering a sales tax hike. Their economy is starting to show signs of improvement and in all likelihood, they will postpone this action.

The Fed will taper in September, but the first move will be very gradual. Interest rates have spiked and they don’t want to add fuel to the fire. Their policies are still very accommodative and they are adding liquidity to the monetary system.

Seasonal weakness will run its course in the next month and Asset Managers will get anxious. They don’t want to miss a year-end rally and the bid will strengthen.

Global economic conditions are improving. Official PMI’s in Europe, China and the US were better than expected in July. Flash PMI’s were released last week and they were very encouraging. This is the second data point and it could be the start of a trend. Next week the floodgates will open and we will get a slew of economic news. I am expecting good results.

Corporations are lean and mean and any uptick in demand will go straight to the bottom line. Cash flows are at record levels and corporations are using cash to buy back shares.

Last week, the market found support above the 100-day moving average. Now it is likely that we will test that level. From a longer-term perspective, I want to see a capitulation low. Ideally, stocks will fall sharply on an intraday basis and reverse. Once I see that price action I will know that it’s time to buy calls. If you want to see what that pattern looks like, reference the SPY on June 24th.

Until then, I will day trade. The price action should be relatively weak today and I will short any bounce. I do not want to hold overnight positions. Once our military intentions in Syria are disclosed, the market will rally.

If you are not a short term trader, stay on the sidelines. Once the dust settles you will have an excellent opportunity to buy stocks (calls). This weakness might take a few weeks to run its course, but the pieces are in place for a year-end rally.
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