Politicians Won’t Act Until the Market Forces Their Hand. Bounce Has Stalled – Volume Is Light

November 27, 2012

Last week, the market rebounded. Friendly rhetoric from DC and seasonal strength pushed stocks above resistance at SPY 140. The momentum has stalled and volumes are very light.

Politicians spent Thanksgiving with their families and that kept the banter between both parties to a minimum. There are many meetings this week and the comments could take on a harsh tone. For the time being, the market is giving politicians the benefit of the doubt.

The longer we go without a deal, the greater the probability of a nasty market decline. Politicians will wait until the last minute and this will force them to take action.

This whole process amazes me. We are not trying to balance our budget; we are just trying to trim our overspending. If we spend $1.30 more than we make each year, we are struggling to reduce that by a nickel (3.8%). Our national debt will balloon to over $20 trillion in the next four years even if they reach a deal.

A watered down agreement might be good for the market in the short run, but deficit spending will haunt us again and again. If entitlement is touched, the reforms will be meaningless and they won’t kick in for another 200 years. We will keep bumping up against our debt ceiling and we can expect credit downgrades in the future. The good news is that we won’t be alone. Europe and Japan are forging the way.

Debt levels are astronomically high across the board (federal, state, municipal and personal). Domestically, I don’t see a catalyst for growth. These sources of spending are contracting, not expanding.

Corporations are hoarding cash. They see the storm clouds ahead and they don’t want to relive the credit nightmare from 2008. They have reduced headcounts and expenses. Balance sheets are strong and they are preparing for lean times.

Companies will not reinvest unless they see a sustained uptick in demand. New regulations and Obamacare are only adding to uncertainty.

Emerging markets depend on growth and the US, Europe, Japan and China. They only account for 15% of global GDP and the tail does not wag the dog. Europe is officially in a recession and Japan faces a fiscal cliff of its own. China’s activity is slowing and it is not the growth engine it was four years ago.

I don’t see the catalyst for economic prosperity. I believe we are heading into a double dip recession and this next phase could be sustained.

The Fed has fired all of its bullets. Quantitative easing has not stimulated economic activity and interest rates are already at zero (US, Europe and Japan). Finally, we will have to let this economic cycle run its course. We have artificially supported growth the last 10 years.

We might still have enough gas in the tank for a small year-end rally. The higher the market goes, the more anxious I am to buy puts.

I am day trading from the long side. I’m keeping my stops tight in my overnight exposure small. If the market falls below SPY $140, I will buy puts. If the market continues to rally and it gets above SPY $143, I will ratchet up my bearish entry point.

On a day trading basis, I often like to use the range during the first hour of trading as a guide. If that range is broken late in the day, I will trade in that direction.

The volume is light and we can expect choppy price action. The next big move is down and I am biding my time. The talking heads in Washington hold the cards.
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