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Experience tells us that the market rallies when European credit concerns subside. We saw this in September of 2010 and in January 2012. Both instances led to a sustained rally and I believe stocks will march higher.
The ECB has convinced investors that it is fully committed and it will do everything in its power to avoid a financial crisis. The European banking union revealed plans for a centralized banking system this week and Germany approved the ESM. These were positive events.
Yields in Spain have declined to the point where the Prime Minister does not feel pressured to ask for aid from the EFSF. The ECB has limitless firepower if it decides to print money. As long as the market believes that it could do so, it might not have to buy any sovereign debt. Traders know better than to fight central banks.
The IMF said that Spain and Italy have “done enough” and they might be inclined to tap into their $1 trillion slush fund if those countries as for aid.
China’s economic growth is slowing, but traders believe that the PBOC will ease. A sustained decline would also lead to government spending on infrastructure. China has a strong balance sheet and their fiscal/monetary policies would have an impact.
Politicians are negotiating a six-month postponement of mandatory spending cuts in 2013. They are trying to roll back the fiscal cliff. Supposedly, they are working towards a more “substantial” plan. We all know they are just kicking the can down the road, but the news is bullish.
The FOMC will meet today and they will not set a timeline for QE3. This will be a slight negative for the market, but the disappointment will wear off quickly. The Fed knows that another round of easing won’t stimulate economic activity. They don’t want to appear politically motivated and this lack of action could be interpreted as a sign of economic confidence.
Asset Managers don’t want to miss a year-end rally and they are getting nervous. The S&P 500 has broken out to a new five-year high and the gains are holding. They all want a pullback, but they won’t get one. The bids will get more and more aggressive and the market will push higher. Any dip will represent a buying opportunity.
The economic calendar is extremely light next week. Nothing will stand in the way of this rally. We can expect lackluster price action and a one-day “pop”. If you are not on board, you will miss the opportunity.
This rally is all about perception. For every bullish statement I made earlier, there is a negative counterpart. Eventually, the lip service from the ECB will be tested. Economic conditions in China will continue to deteriorate and I believe they are headed for a hard landing. For now, those issues are being ignored.
Scale into long positions. I am looking for stocks that are attractively valued and are breaking through resistance levels on strong volume. Asset Managers will give laggards a close look as they play catch-up. We are in “risk on” mode.
Use the Live Update table as your guide. I would not get too aggressive today. I believe the FOMC will have a negative impact, but it won’t last. That dip (if we get one) will be a buying opportunity. Look for lackluster trading and an occasional surge higher next week.