Here Is How Q1 Should Play Out. Market Will Be Choppy With An Upward Bias.
The market staged a huge snapback rally when politicians agreed to a mini deal. We are right back where we started a couple of weeks ago and traders are trying to determine where we go from here.
Economic releases have been positive. The PMI’s in Europe and Asia were better than expected and we know that China will keep its foot on the accelerator. Domestic releases have also been decent. ADP was much better than expected and this morning we learned that 153,000 new jobs were created in December. ISM services also came in better-than-expected.
European credit concerns have subsided and that dark cloud is not weighing on the market. The EU agreed to a centralized banking authority, but the details have to be hammered out. They are still in a recession and that is the bigger issue. Like us, Europe is running massive deficits.
The negatives for the market are earnings and the debt ceiling. Corporate guidance has been dismal and we are on the brink of earnings season. We could see a few warnings and we know that the retail sector will be weak. The debt ceiling won’t be a big issue until February. The fiscal cliff agreement calmed nerves and DC will get a free pass for a few weeks.
The stakes are much higher for the debt ceiling and Republicans will threaten to shut down the government if they don’t see substantial spending cuts and some entitlement reform. Unfortunately, their voice will be weakened.
More Democrats than Republicans were elected and the GOP’s representation in the House and Senate will decrease. The party was divided when Boehner did not put the $60 billion aid package for Sandy up for vote. East Coast Republicans were outraged. This bill was stuffed pork and it needed to be rejected. When the debt ceiling heat gets turned up in a few weeks, President Obama will deliver his inauguration speech. He will demonize the GOP and again their bargaining power will be reduced.
I believe the market will try to push higher. Money has to be invested somewhere and bond yields are ridiculously low. Earnings season will be mixed and guidance will be cautious. If we poke through the 2012 highs, the move will be tenuous. Asset Managers will not chase stocks ahead of the debt ceiling extension.
The rhetoric in DC will get very nasty and the market will pull back. Eventually, Republicans will cave-in and the deal be watered down. Democrats will get their way and defense spending cuts will be the primary way to reduce expenses. Entitlement will barely be touched (Medicare eligibility might be raised by a year). The can will get kicked down the road and the market will love it.
Unfortunately, our national debt will explode. The new revenues and the spending cuts won’t reduce deficit spending. I believe we will be lucky if our deficit for 2013 is the same as it was for 2012. The $60 billion in tax revenue gained from the fiscal cliff deal won’t even cover disaster relief for hurricane Sandy.
For the first quarter, I see some choppiness with an upward bias. Earnings season will be a little disappointing, but stocks are still attractively valued. The rhetoric in DC will spook investors and the market will pullback in February. The debt ceiling will get extended at the final hour and we might lose our credit rating. This would be a temporary negative if it happens. Most of the other developed nations are running massive deficits and their credit rating will suffer as well. All that really matters is that we maintain our status on a relative basis.
Once the can is kicked down the road, stocks will move higher. I can’t see past the first quarter because credit concerns in Europe/Japan could flare up at any time.
I am not trading this week. The market went through a bungee jump and the dust needs to settle.
I still like day trading. Buy stocks if the market is above the one hour range (first hour of trading) and short them if it is below that level. Maintain tight stops. This strategy has been very effective and I’ve caught most of the major moves without any overnight exposure during the last month.
The price action this morning looks dull. We will try to grind higher on light volume. Keep your positions small and try to grind out a profit.
The holidays are over and normal trading will resume in a couple of weeks. That is when our next opportunity will present itself.