No Catalyst Until Earnings – Light Profit Taking Will Reveal Support – Drift Lower Next 2 Weeks
The market has not been able to advance since the FOMC statement. We are likely to see profit-taking during the next two weeks. Economic releases will be soft and bullish speculators will get flushed out.
Every possible catalyst has been thrown at the market the last two months. European credit concerns have subsided and the Fed will keep its foot on the accelerator indefinitely.
There are a few positive events that could hit the market in a few weeks. Greece is negotiating its next bailout package with the troika. Germany wants Greece to remain in the EU and I’m sure they will be able to strike a deal. They are only a few billion dollars apart at this juncture. Spain has not officially asked the EFSF for aid, but recent actions suggest they are getting ready to do so. They might wait a few weeks (until the national elections) and the market will be patient. The biggest catalyst could be that fiscal cliff. Politicians are scrambling to push it back at least six months. Democrats might be willing to extend Bush tax credits and Republicans might bite.
If the fiscal cliff gets pushed back, the market will rally into year end. Don’t expect any developments until November. Politicians are on recess until the election.
China’s economy is contracting and the PBOC has been slow to react. Fiscal spending programs fell short of expectations and their market is currently at a four-year low. Workers at a factory in China rioted last night. Supposedly, the brawl was not work-related. That sounds suspicious since 2000 people were involved. As economic conditions deteriorate, the unrest will build.
I believe China is headed for a hard landing and this will be the next market head ache. The territorial island dispute with Japan could also disrupt trade. Traders will give China a free pass for a month or two. The possibility of monetary easing and fiscal spending will calm nerves. However, fear of a hard landing will escalate into year-end.
The economic releases this week are fairly light (durable goods, GDP and initial claims). Next week, ISM manufacturing/services, official PMI’s, ADP employment, retail sales and the Unemployment Report will be released. We will also have statements from the ECB and the first presidential debate will be held on October 3rd. Soft economic releases will remind traders that global conditions are fragile.
The market will pull back to SPY 143. That was the multi-year breakout and I believe that level will hold. This pullback will flush out speculators. Asset Managers will pull bids so that they can gauge the selling pressure. Once support is established, they will aggressively buy stocks. They do not want to miss a year-end rally.
As long as European credit concerns are pacified, money will shift out of bonds and into equities. Stocks are attractively valued (forward P/E of 14) and the strongest companies announced early in the cycle. Conditions in China have not deteriorated to the point where it will be a major concern.
I believe the market will test the downside this week. I’ve been telling you to take profits on bullish positions and I hope you are out of the market. If not, do so now.
The price action favors a drift lower today and day traders can short stocks. I would keep my overnight risk exposure low. Remember, I am not calling for a market top, just a small pullback.
For those of you with a slightly longer-term perspective, wait. Line up bullish candidates and wait for support. In the next two weeks we’ll have a great opportunity to buy the dip.