No Air Pocket – Traders Ignore the Shutdown. Buy Calls If SPY Closes Above $170 – Keep Size Small

October 1, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Politicians could not find middle ground and the government shut down started today. The market is discounting the event on the notion that a compromise will be reached. This first round of the battle gave each party an opportunity to take a stance. This should have been easy to resolve, but it was not. The real fight will be waged over the debt ceiling in a few weeks.

Stocks retreated yesterday, but they bounced immediately. The early rally this morning has erased all of the losses. I don’t trust this optimistic reaction.

I expected some heavy selling yesterday and follow-through today. If we had challenged the 100-day moving average, I would have been comfortable getting long. Politicians will resolve the CR and from that trough we could’ve seen a nice relief rally. At the current level, I can’t be an aggressive buyer.

Democrats and Republicans are very rigid and the debt ceiling is daunting. The GOP could have added Obamacare back for Congress and volleyed it back to the Senate. This would’ve been a clean solution and it was a chance for both parties to do right by voters. It would have also set the tone for the debt ceiling debate.

I believe the GOP will be pushing for equality for all during the debt ceiling debate. More than 1200 exemptions have been added to Obamacare for special groups since it was passed. If the entire program is initiated in its original form, the GOP feels Obamacare will fail and they can win the Senate back in 2014. If the individual mandate is delayed (like it was for businesses), the GOP (still confident they will win the Senate in 2014) will have an easier time dismantling Obamacare.

DC could not reach a last-minute agreement for the CR and that is a warning sign. If the debt ceiling debate drags on, we will lose our credit rating. That is what happened two years ago and the market tanked on the news. The Fed saw this coming and that is why they did not taper two weeks ago. They are likely to stay the course until the debt ceiling is extended.

Major economic releases are slated this week, but we might not get the Unemployment Report Friday. The Bureau of Labor Statistics is shut down until the CR is extended. ISM manufacturing came in much better than expected today and the releases the rest of the week should be decent.

Earnings season starts next week and there have not been many warnings. This is bullish for the market.

The volley between the House and Senate could continue for a couple of days.

Once the CR is passed, I will buy some calls, but I will not get aggressive. The relief rally will last a couple of weeks and the debt ceiling will keep a lid on the market. If we had pulled back yesterday and this morning, I would have been a more aggressive buyer at lower price levels.

I will buy some Nov calls if the SPY closes above $170 and I will buy more if we close above $171. I will not load up. This is the same game plan we had last week. We did not hit much of an “air pocket” and we will stick with the original plan.
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