The much anticipated US mid-term congressional elections are finally here! Long time readers will of course be familiar with our expectation of both a Republican win (more so for the House than the Senate) and more importantly, that the market had little choice but to rally into that event. Coincidentally, the US Federal Reserve Board is meeting today and tomorrow to both decide the near term direction for US short term interest rates but also to consider the size and scope of the much telegraphed 'QE2' program talked about over the late summer and early fall.
It is interesting to see how the market has slowly worked its way back up to within 1 point of the spring highs. CRI was of course expecting this after a substantial 'buy' signal was registered the week of September 13th (when the market moved back above 112.58). For those that did the trade, congrats! You might even think about taking some profits as we are coming up to a significant resistance point (the April highs at 120.89). For those that did not, I wouldn't be surprised if you get an opportunity to enter at or even below that level in the coming weeks. CRI, of course, has done very well through this market rally. While not in SPY in particular, CRI has been busy 'making hey while the sun's shining'. (Three doubles in junior resource stocks for the month of October alone). For more information of CRI's actual trades please visit (CRI's OnlyDoubles).
Here is my thinking as to what one ought to expect in the coming weeks:
The market appears to be 'buying-the-rumor' (that being both an expected massive quantitative easing program announced by the US Federal Reserve and a more market friendly Republican party in charge of the US Congress).
The problem here, that may be exactly what they get and unfortunatly, that may mean more than what appears on first blush.
1. If the Fed is indeed embarking on another round of QE then does that not mean they see a further deterioration in the US economy in general? Classical economics suggests one likes slightly rising rates, not collapsing rates....So, ok, maybe the economy isn't that bad and they don't need to be as aggressive as last go round....is the market going to be disappointed? Too many ifs for serious money managers in my opinion.
2. If the Republicans come sweeping into power, does that not mean that current congressional programs may loose funding? Is there going to be a transition period? Is there going to be an outright freeze on spending? Again, too many ifs for serious money managers...
Fundamental Summary: There very well could be a 'sell-on-the-news' event. There will be a lot of new fundamental variables to calculate into the equation once all this news is out and it wouldn't surprise me if the market gave back 5 to 10 percent in a period of 'cooling-off'. Having said that, the backdrop for stocks is still very appealing over the medium term (very low short term interest rates and robust international corporate earnings). Additionally, there is a tendency for stocks to do well in the year following a mid-term congressional election. So whatever hangover comes from this big event, it probably won't be too long lasting.
Technical summary: While the market is still very much pointing higher (as both a double bottom in price and a positive 13 EMA vs 30 SMA relationship currently exist) one cant help but get the feeling we are a little toppy. Over the course of the past week we have failed on a few attempts to move higher. Additionally, the move through 112.85 has been uninterrupted which unfortunately means the original stop point (103.73) has not changed. Again, yes the market is pointing higher, but one must be comfortable with the 103.73 level being tested as that is the current key support level. My hunch; we do a 50% retracement of this latest rally [(103.73 + 119.75)/2 = 111.74 or about 6.5% off the high] then put in a base for the X-Mass rally. If one hasn't taken a position or either taken profits along the way, that correction window may be a good time to consider purchases...
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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