The Market Is At the Mercy of Politicians – 75% Chance of Budget Extension

January 19, 2018
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The market won't worry about the budget… until it has to worry about the budget. Stocks have enjoyed a good week and investors have given politicians the benefit of the doubt. Yesterday the House agreed to extend the budget. The more difficult vote will come in the Senate today and it has to be passed before midnight. This event has been marked on the calendar for a month and it is not a surprise. In fact, it's the only thing keeping a temporary lid on this rally. The economic news has been strong this week. China's numbers (industrial production, retail sales, GDP) were good this week. Domestic initial jobless claims fell to 220,000 and that is the lowest level we have seen in years. Central banks are hawkish and global interest rates are rising. Upward sloping yield curves due to economic growth are market friendly. Conditions have improved to the point where Greece is almost done with the austerity program that was forced upon them by the ECB. Portugal’s bond rating was raised a month ago. That is good news for credit markets. The Fed has been relatively dovish and three rate hikes are expected this year. Interest rates are still very low on a historical basis. Earnings have been excellent and the action will crank up this week. Optimism is high and that is reflected in the corporate guidance. Corporate tax cuts will have a major impact on profits this year and valuations are not stretched. Swing traders should remain in call positions. Use SPY $277 as your stop on a closing basis. We might see some selling late in the day if the DC mudslinging continues. Any drop will probably be reversed Monday and I expect the "can" to be kicked down the road. Day traders should be cautious on any opening rally. Today I believe there might be a shorting opportunity. This is where the rubber meets the road and investors won't like the possibility of a government shutdown. Gridlock in DC and a shutdown next week would not be good for the market. This would send a signal that the big negotiation (debt ceiling, budget, DACA, immigration and the wall) will be difficult next month. Politicians have too much to risk in a midterm election year. They will find a way to buy more time and the probability of the budget extension is greater than 75% in my opinion. That news might not come until after the close today. . . image

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