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The market is holding on to support by its fingernails. SPY $138 failed (200-day moving average) and we will see another wave of selling.
Yesterday’s price action was very telling. We briefly breached the 200-day running average in early trading and stocks came roaring back. A bona fide reversal would have resulted in buying throughout the day and the volume would’ve been heavy. That’s not what happened. After the bounce, stocks gradually drifted lower and the market closed on a whimper.
I’m seeing a pattern where stocks open higher and they decline late in the day. This is a very bearish sign and I believe we will see it again today. The opening rally did not last more than 30 minutes and sellers started to unload stocks.
The President met with labor leaders yesterday and I’m sure there were plenty of high fives. Today, Obama will meet with business leaders and I’m sure the tone will be much more serious. In the last two days he has approved 6000 new business regulations.
The President will also meet with Congressional leaders. Both parties know the stakes are high and we will probably get lots of lip service. The market might try to rally on constructive rhetoric, but investors will continue to sell into strength. Politicians have a history of disappointing Americans.
If Republicans dig their heels in, Democrats will take us over the fiscal cliff. Tax increases will take effect immediately and spending cuts can be postponed. I believe this gives Democrats the upper hand. Even if both parties find middle ground, some taxes have to go up and some expenses have to be cut. The party is over and now we have to pay the bill. Anyway you look at it; belt-tightening will weigh on economic activity.
The ECB and the IMF are squabbling and Greece’s next bailout payment hangs in limbo. This will come down to the wire, but they will approve it. Over 1 million people are protesting in Spain, Italy and Greece. They don’t like the austerity plans and unions are on strike. European credit concerns could escalate and we need to keep an eye on yields.
Earnings season is winding down and retailers are reporting mixed results. Retail sales declined .3% in October and consumers are cautious. In general, guidance for Q4 is weaker than expected.
Corporations are not adding to payrolls and that is not good for employment. Demand is soft and they don’t know how fiscal spending cuts, new regulations and Obamacare will impact them.
Asset Managers are usually worried that they will miss a year-end rally, but not this year. We are already halfway through November and the market looks weak. Investors are expecting capital tax gains to rise next year and they are locking in profits.
The market has broken the 200-day moving average and I believe it will continue to drift lower. I don’t believe we will see any major progress out of Washington DC in the next two weeks. Politicians usually wait until the last second. I expect to see a few brief rallies on positive comments from both parties, but those moves will fade quickly.
A swift market selloff could get politicians to act and I want to own puts.
I told you yesterday morning that I was buying back my put credit spreads at a small profit. I also told you that I was buying puts if the market broke below the 200-day moving average. I added to those positions early this morning and I will add later in the day.
I believe the market will selloff late in the day. I will lighten the load next week. I don’t like having large positions into a holiday and Thanksgiving is a week away.
Get short and stay short as long as the SPY stays below $140. If we keep moving lower, we can move our stop down to SPY $138.