Light Holiday Trading Is Setting In. Market Pricing In Deal – Both Parties Still Miles Apart.

December 18, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market rallied on political optimism. The President and the Speaker of the House have an open dialogue. Traders view this as a positive sign and many believe that both parties will reach an agreement before the end of the year.

I’m not optimistic. Boehner keeps offering higher taxes, but he is not getting anything in return. Even if they both find middle ground, he won’t be able to sell the plan to the GOP. There has not been any talk about serious spending cuts. Democrats are counting interest expense savings and Medicare cost savings as spending cuts. We should be doing this anyway.

Both sides are miles apart. I was surprised to hear that Boehner offered a one-year extension for the debt ceiling. That is the biggest bargaining chip Republicans have. If the debt ceiling is raised, Obama will have a blank check and the market will scream higher.

This would kick the can down the road. Unfortunately, our national debt will balloon if this happens. I do not believe a debt ceiling extension will be part of this deal.

The Bush tax credits were intended to be temporary. Republicans should agree to let them expire for Americans making more than $250,000 a year and we should go over the rest of the fiscal cliff.

I still feel that this is the most likely outcome. Republicans might want a higher threshold ($500,000 annual income), but if we go over the cliff, taxes will go up for everyone. If they offer this olive branch ($250,000 per year), they will look like they have put everything on the table. Democrats won’t be able to refuse because so many Americans would be impacted if they reject this proposal.

This problem has little to do with revenues. These tax increases will only fund the government for eight days. Spending is the big issue and the battle will get ugly.

I don’t believe the market will be able to rally through the highs of the year without the debt ceiling being raised. This mini deal will spark a small year-end rally, but Asset Managers won’t pile into the market. Many will reduce risk ahead of uncertainty. Once the mini deal is announced, I believe a shorting opportunity will present itself. This is a “sell the news” event.

Serious spending cuts and entitlement reform will be negotiated when we hit the debt ceiling in January. Those debates will get ugly just like they did in 2011 when we lost our credit rating.

The “fly in the ointment” this week could be earnings. Oracle announces after the close, FedEx reports before the open tomorrow and Nike releases earnings on Thursday. Tech has been weak and Oracle will post consistent results. The news won’t excite investors. FedEx is considered a market barometer and I believe holiday shipping will be lackluster. Guidance will be soft and this release could weigh on the market tomorrow. Nike will give us a peek at retail sales. Consumers are cautious and the guidance will disappoint. I believe earnings will keep a lid on the market.

The economic releases this week (Philly Fed, GDP, initial claims and durable goods) will be in line. This news won’t have a major market impact.

This afternoon, the Speaker of the House will meet with his party. I believe that the concessions Boehner has made will meet heavy opposition. Democrats have not countered with anything that is remotely balanced. This will reduce Boehner’s ability to negotiate and it will reveal a huge chasm between the two parties. Once the reaction is made public, stocks are likely to decline.

Considering all of the events, I believe the market will hold its ground today and it might move a little higher into the close. Overnight, I am expecting weakness. Part of the selling will come from the GOP’s comments to Boehner and part of it will come from earnings releases.

I still like day trading this market. The overnight moves have been relatively small and there is plenty of time to get in the next day. I don’t want to get blindsided by overnight news.

The volume is very light and we are already in holiday mode. Watch the first hour of trading and note the range for the SPY. If we are trading above the range throughout the day, focus on bullish trades. If we are trading below the one hour range, focus on bearish trades. Find stocks with relative strength/weakness and day trade them. This approach will help you make money while we wait.
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