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The dark clouds that recently plagued the market are parting. Seasonal weakness is winding down and Congress does not support air strikes in Syria. Economic conditions continue to improve and Asset Managers are buying stocks.
President Obama will address the nation tonight. Support for an air strike is waning and Senate leader Harry Reid canceled a vote in the Senate because he knows he does not have enough votes. The House is overwhelmingly against an air strike according to polls.
Secretary Kerry suggested that an air strike can be avoided if Syria hands over chemical weapons. Russia immediately took steps to promote that course of action. No military action in Syria by the US is bullish for the market.
Overnight, China’s industrial production, retail sales and foreign investment were all better-than-expected. Official PMI’s for July and August exceeded expectations and exports to Europe are on the rise. Activity in the EU has hit its best level this year.
Domestic economic activity is also improving. All of the data released in the last three months has been encouraging. The big three automakers posted a 17% increase in sales during the month of August and they are on pace to sell 16 million cars this year (pre-crisis levels).
Corporations are flush with cash and they are buying back shares. We also saw two large M&A deals last week. Profit margins are healthy due to cost-cutting and any uptick in demand will go straight to the bottom line.
Next week, the FOMC will release its statement. I believe they will taper and the initial move ($10 billion reduction in bond purchases) will be small. Their monetary policy is still accommodative and they are adding liquidity. Traders will not like the taper initially, and I am expecting a brief pullback.
The market will eventually accept the move. Higher interest rates will be tolerated because they are accompanied by strong economic growth. The sequester has run its course and we are set up for a nice year-end rally.
I’ve been telling you to get long for more than a week and I hope you took my advice. The SPY is above its 100-day moving average and it is above horizontal resistance at $167. If we rally to $170, the move will be getting a little over-extended. I plan to take profits ahead of the FOMC next week.
Any dip from this point forward will be brief and shallow. I am hoping for a negative reaction to the Fed’s statement. I will aggressively buy calls once support is established. In the unlikely event that the news sparks a rally, I will also buy calls on strength.
Ride the momentum and hang on to your calls. President Obama’s speech tonight should be bullish. He has painted himself into a corner and I doubt he will go against Congress.
The market has been able to build on early gains and it should grind higher into the close.