Look For An Early Low and Buying Late In the Day. SPY Needs To Make A Higher Low.

October 19, 2012

The market started the week off on a strong note and we can expect prices to pull back before moving higher. Earnings are being released at a fast clip and there is a lot of news to digest.

IBM, Google and Microsoft are weighing on the tech sector. Google’s earnings were accidentally released before the close and the 60 point drop created chaos Thursday afternoon. Traders have had a chance to sift through the numbers and I believe this will be a nice entry point. However, it needs to form a base at this level – don’t buy yet. Microsoft will be releasing Windows 8 and they have a new tablet that is getting rave reviews. The tech giant should bounce.

As expected, revenues across the S&P 500 have been light. The good news is that earnings for Q4 are forecasted to be 10% higher and that is much better than expected. I still believe that macro conditions will push the market higher.

Credit concerns in Europe have subsided and Spain’s auction went well this week. They will formally request aid in the next few weeks and that will be a bullish event. Greece will secure its next payment and that will also be bullish. European credit concerns will not be an issue in 2012.

China’s economic growth is stabilizing. GDP grew 7.4% and that was better than feared. The economic releases this week were good and I’m expecting a decent flash PMI number next week. Even if economic activity is light, traders will give China a free pass. The government is increasing fiscal spending and the PBOC is easing. We can expect this to continue through the leadership change in a few weeks.

Economic conditions in the US continue to improve. Yesterday we got a strong Philly Fed number. Housing starts are on the rise and the job scene is improving.

Companies are lean and mean and any future revenue growth will go right to the bottom line. Stock valuations are attractive, balance sheets are strong and the S&P 500 dividend yield is higher than the yield on 10-year US treasuries. This combination will encourage Asset Managers to rotate out of fixed income and into equities.

The fiscal cliff is the only dark cloud. President Obama is complicating the issue by making ultimatums. He said that he will veto any plan that does not increase taxes to high income Americans. If the fiscal cliff is going to get postponed, both parties need to come to the table with a clean slate and we need to negotiate. Politicians are in recess and nothing will get solved until after the elections. The fiscal cliff will not be an issue for a month unless the rhetoric between both parties heats up.

The market is giving back gains this morning. Asset Managers have pulled bids and they want to gauge the selling pressure. I believe a low will be established mid-morning and prices will firm up later in the day.

By all means, we must not retest SPY $143. If the market does not make a higher low, we could be in trouble. I would like to see support at SPY $144 and I want to see buyers aggressively step in at that level. That will tell me that they want to get long into year-end.

If the market retests SPY $143 (not likely), I will close all of my long positions.

With the exception of the fiscal cliff, all of the pieces are in place for a nice year-end rally. Try to weather this storm and stay long.
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