PMIs Were Better Than Feared – ISM Good. The Bid Is Strong. Start Scaling Into Call Positions.

October 1, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Since the FOMC statement, the market has been drifting lower. Last week, it filled in that move and it tested the breakout. SPY $143 held and stocks look ready to move higher.

The news over the weekend was better than feared. Official PMI’s were in line with expectations. ISM manufacturing rose to 51.5 and the S&P 500 surged 8 points on the news. Initial jobless claims have been steady the last few weeks and I believe the jobs reports this week will be benign.

The first presidential debate will be held Wednesday night. Based on the polls, traders are pricing in an Obama victory.

Earnings season is right around the corner (October 9) and Asset Managers don’t want to miss a year-end rally. The bid will strengthen with each passing day. Corporate revenues will be soft, but cost-cutting will preserve the bottom line. Guidance will be cautious. This backdrop would not normally be conducive for a rally. However, bond yields are at historic lows and Asset Managers will rotate out of fixed income and into equities.

Stock valuations are attractive a forward P/E of 14. Balance sheets have never been stronger and companies are running lean and mean. Any uptick in revenues will go straight to the bottom line.

The key to this rally is Europe. As long as credit concerns remain low, Asset Managers will remain in “risk on” mode. Spain will formally ask for a bailout and Greece will get its next payment. These will both be bullish events for the market. Traders will also monitor the ECB’s progress as it forms a centralized bank.

Europe is in a recession and bad news is already priced in. China’s economy is contracting, but many analysts feel that stimulus is right around the corner. Their market is closed this week, but they will see a leadership change in the next few weeks. Analysts believe that the new leader will initiate fiscal spending and the PBOC will ease. These actions will help during the transition. Even though global economic conditions are tenuous, I believe they will not spoil a year-end rally.

Politicians are scrambling to strike a deal. They want to postpone the fiscal cliff. Congress is in recess until the elections and I don’t believe a deal will get done before then. This dark cloud will loom, but it will not weigh on the market until December.

The market wants to move higher and I suggest scaling into long positions. I don’t believe we will get much of a pullback this week. Like Asset Managers, I don’t want to miss a year-end rally.

Look for stocks that are in a long-term uptrend and have consolidated in a tight range. That consolidation could be after a small pullback or it could be near the highs of the year. In either case, the stocks should be breaking through horizontal resistance on heavy volume. This technical pattern produces sustained moves. IBM is a good example of what I am looking for. daily Report subscribers – it is near the top of the Live Update table. Focus on these stocks!!

Start scaling into long positions. Today’s rally will set the tone for the next week. The FOMC breakout was tested and the bid is strong. I’ve been telling you line up your longs for the last week. It’s time to ease into call positions.
.
.
image


Previous Bulletin

September 28, 2012

Next Bulletin

October 2, 2012
Top