Last week the market declined on fiscal cliff fears. The 200-day moving average failed and the selling pressure was heavy. On Friday, politicians put on their happy face and reassured the country that both sides were ready to negotiate. Stocks staged an impressive reversal and that momentum is continuing today.
The SPY gaped above the 200-day moving average and we are sitting at this level. The news is light this week and the volumes will drop into Thanksgiving.
There isn’t any substance behind the move, but that does not mean it won’t continue. In July, European yields were breaking out to new highs. Credit concerns were escalating and with one statement, the ECB President stopped the bleeding. Global markets rallied 10% on the notion that Europe’s central bank would do everything to avoid a financial collapse.
The market is oversold and we were due for a bounce. However, pain lies ahead.
I’m hearing rumors that both parties will agree to a plan that reduces deficit spending by $50 billion next year. Keep in mind, we will still be running a deficit that is near $1 trillion. We will simply be $50 billion closer to a balanced budget. In the grand scheme of things, this is a drop in the bucket.
Supposedly, politicians will work a substantial plan in 2013 if this goes through. Where I heard this before?
Taxes will increase next year. I believe the economy will be able to absorb this hike. The spending cuts are another matter and they will immediately impact economic activity. Business regulations are increasing and Obamacare will be phased in. Even if we avoid most of the fiscal cliff, uncertainty lies ahead.
Consumers are cautious and retail sales declined .3% last week. Wal-Mart is the largest retailer in the world and it provided dismal guidance last week. Europe’s economy is officially in a recession and Japan’s activity is declining. Businesses are not going to add to payrolls until they see an uptick in demand.
The news is relatively light this week. Initial jobless claims will be released Wednesday. Last week’s number was sky high and we should see some improvement. Unemployed workers tend to postpone applications ahead of major holidays. Flash PMIs will be posted Thursday and our market will react Friday morning. Europe will be weak and China will be stable. These events should not have a major market impact.
Asset Managers are not worried that they will miss a year-end rally. They see the storm clouds ahead and many will reduce risk if the market rebounds. That will contain any rally.
Even if politicians approve a “watered down” sequestration plan, trouble lies ahead. The market is pricing in a deal. The negotiations are just starting and I would expect positive comments in the early going. As they get down to “brass tacks”, the rhetoric could get heated. There is no reason to believe that this will go smoothly.
I sold half of my put positions on Friday for a nice profit. The market broke through resistance and I had my stops in place. If the market closes strong, I will exit the rest of my put positions today. On the other hand, if the market pulls back late in the day, I will only exit half of my remaining position.
I am not entering new positions today. Manage your short positions and don’t worry about getting long.
We are in for choppy trading and we will see some wild swings. In this market you have to be nimble and you have to take profits.
I believe another shorting opportunity lies ahead. For now, I want to let stocks run. If we close above the 200-day moving average, that will be our entry point for short positions if it is breached in the future. If the market continues to rally and it gets back above SPY $140, that will become our new entry point for shorts when it is breached.
If this level holds today, I will try to sell a few out of the money put credit spreads tomorrow to take advantage of time decay. I will keep my positions small and I will distance myself from the action.
We have flat lined since the gap up and we might sit here the rest of the day.