This Is the Greatest Threat To A Year End Rally – It’s Not the Fed
Posted by Pete Stolcers on September 25
Posted 9:00 AM ET – The market wants to rally, but the headwinds are stiff. Some of the pending issues need to play out. Tomorrow the Fed will hike interest rates and their statement will be scrutinized. Many analysts are hoping for a dovish statement, but a neutral statement is the best we can hope for. Wage inflation and a strong stock market will keep the Fed in tightening mode.
Trade negotiations with China have broken down. They will wait until after the elections. If Democrats win the House they feel that the tone could improve. Europe promised to work towards a “zero tariff” policy, but they can’t even come to terms with one of their own members after a year and a half (Brexit). We are not likely to see a deal with Europe before the election and a piece-meal agreement is possible. Canada is digging its heels in and NAFTA is set to expire soon.
Credit concerns will grow as global interest rates inch higher. Currency devaluations in emerging markets need to be monitored. Credit conditions should be tenuous, but stable through year end.
Economic growth is strong and the Atlanta Federal Reserve expects to see 4.4% GDP growth on Friday.
Corporate profits are robust and valuations are reasonable at a forward P/E of 16. Earnings season will start in a few weeks and tariff related warnings could spoil a year-end rally. In my opinion this is the greatest current threat. Record profit growth is priced into the market.
Swing traders should have an intraday stop at SPY $290. As long as that level holds we will ride the wave.
Day traders should be cautious. The trading range has been tight after the first two hours and we could be “dead till the Fed”. Make sure there is momentum before you enter a trade. If the market is above/below the first hour high/low you can get a little more aggressive.
One of the pieces of information we have been waiting for will be known tomorrow. I believe a neutral statement from the Fed is the best we can hope for. This is a potential speed bump, but the damage will be relatively contained.
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