The market got everything it wanted this week and it rallied to a new all-time high. Good news is priced in and we still have some speed bumps to navigate. Asset Managers will not chase at an all-time high and I believe the rally will stall.
Four Fed Officials will speak this afternoon. After the FOMC’s decision not to taper, dovish remarks are expected. Any surprise favors the downside.
The House will vote on the continuing resolution today. It will defund Obamacare and it will pass. The Senate will reject it immediately and the debt ceiling rhetoric will escalate. President Obama said that Republicans are committing extortion.
Germany will hold its national elections this weekend. The market has priced in a Grand Coalition (50% probability). Once again, any surprise favors the downside.
Flash PMI’s will be released Monday morning. Europe and China have been trending higher and good numbers are expected. Any surprise favors the downside.
After a 6% rally in less than a month, the market is overextended. We still have a number of issues to work through and Asset Managers don’t feel like they will miss a year-end rally if they don’t buy now.
Janet Yellen will be an excellent Fed Chairman, but her policies won’t differ much from Larry Summers. The Fed did not taper, but they will by the end of the year. Their cautious view of the economy could be a red flag.
I am still bullish and I believe we will have a year-end rally. However, I can’t get long at this level with so many unresolved issues.
The market should challenge the breakout at SPY $171. If it fails, bullish speculators will be flushed out. Debt ceiling threats in DC could push us down to the 100-day moving average.
Because of my longer-term bullish outlook, I can’t justify taking overnight bearish positions. I am shorting stocks on an intraday basis. If the SPY closes below $171, I will buy some puts (very small). Focus on laggards (basic materials and retail) that have been dragged higher by this rally. These groups are running out of steam and they will roll over.
Swing traders, be patient. A better entry point lies ahead. Even if the market does not pullback, some of these issues will be resolved and you can get long with confidence.
Fed speak and the continuing resolution vote in the House today could spark selling and I believe we will drift lower into the close.
If I don’t see weakness today I will stay sidelined.