No News Is Good News – Deal Priced In. Day Trade the Rally – Keep Overnight Risk Low.
No news is good news. The market keeps grinding higher on the notion that politicians will strike a fiscal cliff deal. Time is running out and they need to get it drafted in the next week to make the year-end deadline.
I still believe we will see a mini deal. Republicans will agree to raise taxes on the rich so that they can keep the Bush tax credits in place for Americans making less than $250,000 per year. Democrats will have to agree to this because it appeals to the largest voter base and it gives Obama what he has been asking for.
Republicans will not extend the debt ceiling. This is their bargaining chip. If Democrats won’t agree to keeping taxes low for middle-class Americans, they will look like the” bad guys”.
Republicans know that once tax increases are in place, Democrats won’t cut spending. Liberals will conjure up phantom Medicare cost savings and try to use this in lieu of actual spending cuts. That won’t fly with Republicans. The US will bump up against the debt ceiling in another month and this will be the “Battle Royale”.
President Obama was hoping to raise the debt ceiling without congressional approval. His team of advisors investigated the 14th amendment and they determined that he does not have the power to do so. Both parties will be forced to negotiate spending cuts and entitlement reform in 2013.
I don’t believe this solution will sit well with the market. This will just postpone the inevitable for another month or two. Our economy should be able to shoulder tax increases, but spending cuts would have an immediate impact on economic activity. Corporations will not invest or add to headcounts until the debt ceiling is resolved.
For the time being, the market is pricing in a deal and seasonal strength is pushing stocks above resistance at SPY $143. The volume is light and this move is tenuous.
I am day trading stocks with strong fundamentals that have been beaten down. I want to see a strong support level and a rally through minor horizontal resistance. These stocks are a value play and Asset Managers will rotate into them even if the market does not rally. Look for rotation into these stocks and keep your overnight exposure low.
I still believe the rug can get pulled out from under this market at any time. We could see a sharp decline and that will force politicians to sign a mini deal. I will not buy puts until I see a breakdown below the 100- day moving average.
The economic news is light this week and the data from last week was generally positive. The FOMC will remain accommodative and European credit concerns won’t be an issue. Yields in Italy pulled back and Spain had a good overnight auction.
It’s all about fiscal cliff. Day trade this rally, but keep your overnight exposure to a minimum.