Yesterday, stocks continued to push higher and the market is back above the 200-day moving average. Since Friday’s low, we have rallied 3.2%. Bargain-hunting got the ball rolling and shorts were forced to cover. The action should slow down the rest of the week.
Many analysts believe that politicians will strike a deal. The best outcome for the market is a “watered down” solution that minimally increases taxes and postpones spending cuts. Entitlement, the 800 pound gorilla, won’t even get touched. There will be talk of a “grand bargain” later in 2013, but we all know that won’t happen until we have our backs against the wall.
If this transpires, we will see a nice year-end rally. I doubt we will get anywhere near the highs of the year. We would see profit taking well before that.
Politicians put on their best game face last Friday and they told the market what it needed to hear. When they return to Washington next week, the squabbling will begin behind closed doors. They only have about 10 working days to find a solution.
Deficit spending has exploded in recent years. Entitlement programs will keep us on that path and tax hikes/spending cuts will barely make a dent. All of our annual tax revenues (100%) are spent on entitlement and interest. Tax hikes will only pay for a fraction of the $1 trillion a year we spend on defense, education, transportation, Homeland Security…
We are no longer kicking the can down the road, we are kicking it up a very steep hill and it keeps rolling back.
Europe and Japan are in a similar situation. Overnight, Moody’s downgraded France’s debt and they lost their AAA rating. This was expected and the news did not have much of an impact. I was surprised that it had not been downgraded a long time ago.
Corporations will hold off on hiring as long as possible. The guidance for Q4 was very weak and from a demand standpoint, there is no need to add to payrolls. In the last week President Obama approved 6000 new regulations. Obamacare will be phased in and companies are not going to hire until they know the impact.
Global economic conditions are soft. China’s activity has stabilized, but Europe is in a recession. Japan’s economy is also weak. Domestically, recent releases have been dismal. Tomorrow we will see if last week’s spike in initial jobless claims was a fluke or a trend.
As you can tell from my commentary, I am not very bullish. The market will try to push higher into Thanksgiving. Trading volumes will be very light. Next week, reality will set in. Retail sales from Black Friday will be disappointing and politicians will return to DC.
I am going to sell a few out of the money put credit spreads today. I am focusing on strong stocks with defined support. If the market closes below the 200-day moving average, I will buy them back. I want to keep my size small and I want to take advantage of time/volatility decay. I plan to close these positions for a small profit on Friday and I don’t want to hang onto them over the weekend.
If the market trades below the 200-day moving average next week, I will buy puts. The big price swings we’ve seen in the last week will continue and comments from Washington DC will drive the action.
Keep your size small.