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House Voting On Tax Hike. Here’s How the Market Has Reacted In the Past

Posted by Pete Stolcers on September 13

Posted 9:30 AM ET – The market has seen some selling pressure in the last week. Typically a close on the low like we saw Friday will have some follow through the next day. The S&P 500 is up 25 points before the open and buyers are undeterred. We are seeing two-sided price action and the market feels tired. I underlined the comments that changed from Friday.

Reasons to stay long:

1.Central bank money printing has pushed interest rates to historic lows and bond yields do not keep pace with inflation (negative real returns).
2.All of this money has to go somewhere and stocks are still the best alternative.
3.Corporate buybacks are reducing the supply of stock. Lower supply and higher demand means higher prices.
4.Economic numbers have been solid (although slightly below expectations).
5.The upward momentum is very strong and the dips are shallow and brief.

Reasons to be careful:

1.The forward P/E on the S&P 500 is at 21 and the last time it was this high was in 2000 before the “tech bubble”.
2.Earnings comps will be harder to beat because we were starting to rebound from Covid a year ago.
3.September is a seasonally weak month.
4.The Fed will start tapering in 2022. Europe will start sooner and S Korea raised rates a few weeks ago.
5.VIX is low and that suggests that Asset Managers are unhedged. Big drops happen when no one is expecting them.
6.Covid is hampering global growth.
7.There have been seven consecutive higher monthly closes on the S&P 500 and in the last 25 years there have not been eight.
8.We have seen selling pressure the last week,

Quick note on the proposed tax hikes that the House will vote on. Corporate and personal taxes hikes have not historically had a long term impact on the market. With bond yields producing negative real returns, stocks are still the best investment alternative. Sellers will remain passive until the tax hikes are passed by the Senate (unlikely) and even then the selling based on this news should be temporary. I do not see this as a big market threat.

Interest rate hikes and credit concerns are the only longer term spoilers for this rally and there are no imminent signs of trouble.

Swing traders with a 3-4 week horizon should stay sidelined. This is a seasonally weak period and I believe risk is elevated.

Day traders should expect two-sided price action. We have seen nice drops with momentum during the day. Stay flexible. The best strategy is to wait for dips and to buy relative strength on support. Friday is a “quadruple witch” and we can expect at least one volatile day this week.

Support is at SPY $445. Resistance is at $450 and $453.
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