The price action was a little choppy this week and some of the nervousness has been worked off. Profit taking lead to selling by bullish speculators and the market breached support at SPY $167. The FOMC minutes did not provide much clarity and the market established a low that was above the 100-day moving average. Global flash PMI’s were very encouraging and I believe we will grind higher next week.
The market can shoulder higher interest rates if economic conditions continue to improve. China, Europe and the US all posted better-than-expected results. This is the second consecutive data point and it could be the start of a trend.
Even if the Fed starts to taper in September, the decline in bond purchases will be negligible. They do not want to force interest rates to move higher and they will gradually ease into this phase. The Fed’s policy is still accommodative and they are adding liquidity to the system.
Asset Managers will not buy stocks at an all-time high, but they will buy dips. The economic releases this week will attract buyers and the bid will strengthen.
End of month fund buying and a major holiday are both bullish for the market. Disappointing earnings from retailers are factored in and we should see the market grind higher next week.
The volume will be light and I will be focusing on day trading. I will carry a few overnight call positions, but they will be minimal. Option buyers will be fighting time decay during the next 10 days.
My only concern is that we did not test the 100 day moving average. I wanted to see a capitulation low near that level. Given the recent news, we might not drop to SPY $163.
Japan might increase its sales tax in October and US politicians might hold the debt ceiling hostage. These issues will come to light after Labor Day, but as usual, politicians will kick the can down the road. These dark clouds could spark selling, but Asset Managers will be anxious to buy the dip. They know that these things always get resolved in the final hour.
August and September are seasonally bearish and with each passing week, Asset Managers will get a little more anxious. They don’t want to miss a year-end rally and the bid will strengthen.
I want to take some bullish positions now, but I don’t want to get too aggressive.
Look for stocks that are in a strong uptrend and have recently broken out. Ideally, that breakout will have been preserved during the recent market decline. These stocks have consolidated and they will lead the rally when it resumes.
Look for a gradual grind higher during the next week. The volume will be extremely light – be careful.