Last week, the market tanked after President Obama was reelected. The focus immediately shifted from the election to the fiscal cliff. Politicians have dragged their feet for 18 months and if they can’t find a solution before January, GDP in 2013 could decline by as much as 5%.
The rhetoric has been fairly constructive and Republicans seem willing to consider tax increases. Democrats also need to reduce spending and reform entitlement. I believe traders will give politicians a week or two to get their act together. Every word will be scrutinized and any mudslinging will result in a market decline.
Both parties know that the stakes are high. If Republicans don’t budge, Democrats might be willing to go over the cliff. Tax hikes will take effect immediately and they can postpone spending cuts. This might give Democrats a slight upper hand.
Obamacare will gradually take effect next year and corporations will postpone hiring. They want to see how the new program will impact payroll expenses.
The economic news is fairly light this week (PPI, retail sales, FOMC minutes, CPI, Empire Manufacturing, the Philly Fed, initial claims and industrial production). Activity has been stable and these releases will not have a major impact.
Credit conditions in Europe remain stable. Greece passed the second austerity vote and they should get their next bailout payment. Spain still needs to formally request aid. European credit concerns should not be an issue in 2012.
Economic conditions in China are stable and the government will do everything in its power to provide a stiff tail wind for the new leader.
The bond market is closed today in observation of Veterans Day. The trading activity should be lighter than normal. As we head into the holiday next week, volumes should decline.
As long as the rhetoric out of Washington DC is constructive, the market should be able to find support. I believe it will work its way back above support at SPY $140. We will stay at this level and wait for news.
Any negative comments by either party will result in a market selloff. Politicians know what is at stake and I am not expecting heated arguments.
I am selling out of the money put credit spreads on strong stocks that have a defined support level. If that support is breached, I will buy back my spreads. If the market can’t hold the lows from last week, I will buy back my spreads. I believe the market will stabilize and option premiums will decline. I want to distance myself from the action and take advantage of time/volatility decay.
Look for a quiet day. Bears will test the downside and buyers should come in late in the day. If they do not, the lows from last week will be tested tomorrow.
I would like to thank all veterans who have proudly served our country and preserved freedom around the world. Happy Veteran’s Day!