Black Friday Sales Declined For the First Time In 4 Years. This Rally Is In the 9th Inning

December 2, 2013

The news vacuum is behind us and the action should pick up this week. Major economic releases are scheduled and they will have to carry us the rest of the year.

The market sits at an all-time high and Asset Managers won’t chase stocks after a 25% run this year. Bullish sentiment is high and speculators need to get flushed out. A small round of profit taking would accomplish this.

As we get closer to year-end, the debt ceiling, the continuing resolution, the impacts of Obamacare and the threat of tapering will weigh on the market. I feel that Obamacare could kill this sluggish recovery.

The healthcare program is designed to add 30 million low income people to the program. From a consumption standpoint, this group does not contribute much to economic growth. Unfortunately, other Americans will pay more for their insurance. They do spend more and this added expense will bite into consumption.

Obamacare has been launched and it is the law. Even if Republicans win the House and the Senate in 2014, it will be too late to turn back. The government has been very slow to release statistics and individuals are just starting to learn how this new program will impact them financially.

Individual healthcare premiums (for those who do not qualify for subsidies) will rise and so will deductibles. Businesses will also pay higher premiums because they will have to add benefits to meet minimum requirements. Some of this cost increase will be passed on to employees.

I am covered under group insurance with Blue Cross of Illinois. My insurance meets the new minimum requirements and I have not made any changes to my plan in the last five years. I just learned that it has been grandfathered. Per normal, my rates went up in October. Last week I received a letter telling me that new Obamacare fees will be passed through and my rates will increase by $90 per month ($100/year) starting January 1, 2014. In the next few months, middle-class Americans will feel the effect.

Realize that I am not making a political statement. It is my job to analyze macro-economic events and this program will impact the economy. Healthcare accounts for 18% of our GDP and it is now in the hands of our government.

Retail sales for Black Friday declined 2.9%. This is the first drop since the financial crash in 2009. The discounts were deep and stores were open longer. This is not a good sign – consumers are tightening their belts.

China’s PMI came in better-than-expected and so did ISM manufacturing this morning. ADP, ISM services, the Beige Book, GDP and the Unemployment Report will be released this week. I am expecting decent numbers that are consistent with moderate growth. I do not believe the Fed will taper until Janet Yellen takes office and the debt ceiling is extended.

Earnings season is winding down and the results were good. Analysts are maintaining their projections for the S&P 500. Cash flows are strong and companies are buying back shares.

This has been a banner year for the market. Asset Managers will buy dips, but they won’t chase. Some will take profits if the rally gets overextended. These two forces will cancel each other out and we are likely to chop back and forth. I believe this rally is in the ninth-inning and the selling pressure will build in February.

I sold some out of the money put credit spreads two weeks ago and those positions are working out nicely. I was able to distance myself from the action and take advantage of time decay. If the SPY trades below $180, I will buy them back. Otherwise, I will let them expire worthless.

At this juncture, I am more inclined to short the market. I won’t do that until I see some selling pressure. My first trigger is SPY $180 and my trades will be small.

If the market continues to march higher, I will milk my put credit spreads and I will stay sidelined.

The Black Friday sales number was dismal and the market is defying gravity today. Tread very cautiously; there is no need to take unnecessary risks ahead of major economic releases.
.
.
image


Previous Bulletin

November 27, 2013

Next Bulletin

December 3, 2013
Top