The market has been able to rally back above the 200-day moving average. We should seek positive price action today and Friday, but resistance at SPY $140 should hold. Trading volumes will decline substantially.
Cyber Monday has traditionally been weak and I’m expecting that to be true this year. Tensions in the Middle East are escalating, politicians will start squabbling over the fiscal cliff and retail sales from Black Friday won’t live up to expectations.
Flash PMI’s for China and Europe will be released tomorrow. Europe is officially in recession and the expectations are low. China’s economic growth has stabilized and it should show slight improvement. These releases should not have a major market impact.
Domestic economic conditions have been soft. Empire Manufacturing, the Philly Fed, industrial production and initial jobless claims were all disappointing last week. Today, initial claims came in at 410,000. Much of the recent increase has been attributed to Sandy.
Even if politicians are able to find middle ground, a watered-down sequestration will still impact economic activity.
Corporations are not hiring. Demand is soft, regulations are on the rise and healthcare costs are unknown.
The best case scenario for the market is a $50 billion reduction in deficit spending for 2013 (less than the fiscal cliff plan). There will be some tax increases and some spending cuts. This will get passed on the notion that a “substantial” long-term plan will be drafted in 2013. This would set up a quick 5% rally. The market would stall and profit-taking would set in.
The worst-case scenario is that both parties start arguing. Many Democrats feel like they have the upper hand because tax increases would take effect immediately and they can postpone spending cuts. Some are willing to take us over the cliff. If this happens, the market will tank.
As we get closer and closer to the end of the year, the market will come under pressure. Steady progress has to be made and the friendly gestures made by both parties last week will wear off quickly.
Look for positive price action through Friday. Resistance at SPY $140 will hold. Sellers will return Monday and the market will test the 200-day moving average next week.
I sold some put credit spreads yesterday and I will buy them back Friday. I am just trying to take advantage of time/volatility decay. I might buy a handful of puts near the closing bell on Friday.
I expect to see violent swings in both directions. This is not typical price action for the end of the year. Traders will scrutinize every word by both parties and that will drive the market.
Life constantly presents us with challenges. Take time tomorrow to focus on the positives.
May you and your family be blessed this Thanksgiving.