The price action last week was unusual and huge reversals off of a new high are typically a warning sign. Stocks rebounded on Friday, but they are drifting lower today.
A few Fed officials have been speaking and their comments have been construed as hawkish. Some analysts believe we will see a taper in December. If this is the reason for today’s dip, it will be brief and shallow.
I don’t believe the Fed will taper until Janet Yellen takes office and the debt ceiling is extended. Current economic data is distorted by the government shutdown and the Fed will wait for the dust to settle.
There could be a bigger problem that no one is paying attention to. Most Americans do not favor Obamacare. If they are not personally affected, they are secretly celebrating its failed rollout. Unfortunately, the financial impacts have overlooked by the stock market.
This week the government will release its enrollment statistics. These numbers will be padded. They will count prospects that loaded an insurance plan in their shopping cart, but did not commit to purchase it. These people could simply be doing comparison shopping and the numbers will be inflated.
If we learn that only a handful of people are signing up, the government will miss its targets. HMOs priced coverage based on a large mix of Americans. If the majority of enrollments are for the sick and uninsured, premiums will jump. Insurance companies will have to adjust rates. We might also learn that the majority of sign-ups are for Medicare. It is much more expensive than Obamacare and this will instantly add to our national debt.
Individuals on average have been paying thousands of dollars more for Obamacare coverage and their deductibles are higher. This money will come right out of the economy and it will destroy consumption. This could equate to a massive tax hike.
The website is still down and with each passing week Americans are losing confidence. Many don’t want to sign up because they feel their personal information is at risk. Security issues need to be addressed. I am also hearing that the backend is in much worse shape than the front end.
All of the news (economy, earnings and interest rates) has been good. Obamacare could be the spoiler because no one is considering it and because we don’t have any enrollment information. This news might spark a swift decline. The full impact won’t be felt until 2014.
Watch the market reaction when the news is released. If the SPY trades below $175.60, that is the first entry point for shorts. Add to positions if the market falls below $175 (last Thursday’s low). I am still bullish, but I am willing to take a short position if the reaction is negative. Bullish speculators still need to get flushed out of the market and this could be the catalyst.
Support at SPY $172 should hold and I would start looking to buy at that level.
My tone has changed in the last few days. I am constantly looking for catalysts and spoilers. I have discounted the financial impacts of Obamacare to this point, but I believe it could be a game changer. Consequently, my participation in an upside breakout from this level will be small. I will only allocate 20% of my normal trading size versus 33% a few days ago. Furthermore, I had not considered shorting this market. Now, I am comfortable doing it.
If we do get a nice pullback, I will be more aggressive with my call buying once support is established.
If you do take short positions, know that your stops need to be tight and you are fighting the trend. This should only be considered by aggressive accounts. Swing traders should remain on the sidelines during the pullback and they should be ready to buy once support is established.
The market has bounced from its early lows, but I feel it will drift lower throughout the day. Again, watch the market’s reaction after the enrollment numbers are released this week (no timeline).