The market bounced off of major support at SPY $143 and we’ve seen two powerful rallies this week. Earnings have been better than feared and guidance for the fourth quarter has been excellent. On average, companies are raising earnings estimates by 10% for Q4. This is significant, but it’s important to remember that we are early in the cycle.
After the close, Intel and IBM posted results. Both stocks are down this morning and the market has been able to shoulder the news. With each passing day, earnings jitters will disappear. Asset Managers don’t want to miss a year-end rally and the bid will strengthen.
For the last few weeks I’ve been telling you to scale in. Yesterday I completed my position and I am all in. This rally has plenty of room to run.
European interest rates are stable and large institutions are buying PIIGS debt. They are buying short-term maturities because they believe the ECB will backstop them. Spain and Greece will be bailed out and credit concerns will remain subdued through the end of the year.
China has ramped up fiscal spending and the PBOC has been easing. They want to make sure the leadership change goes smoothly and they will continue to pump money into their economy. Traders will look past any short-term weakness knowing that conditions will improve.
Economic activity in the US is gaining momentum. ADP and the Unemployment Report showed improvement in the job market. Last week, initial claims dropped to one of the lowest levels in years and that bodes well for October’s employment report. ISM services/manufacturing, retail sales, factory orders and consumer confidence all improved.
With the exception of the fiscal cliff, “all systems are go”. Politicians are in recess until the election and this dark cloud will loom over the market. Both sides want to postpone the fiscal cliff and the consensus is that they will strike a deal at the last minute. I am mainly concerned with the rally the next two weeks. As long as traders believe a deal will get done, the fiscal cliff won’t keep a lid on this rally.
Stay long and ride the wave. After the close we will hear from AXP and eBay. Tomorrow morning we will hear from MS, TRV and UNP. I’m expecting good results from all of them. If initial claims are not adjusted higher, the market will rally on the notion that companies are starting to hire.
The market should be able to grind higher this week. I’m expecting the highs to be challenged next week.