The overnight news was benign. China’s PMI was in line and initial jobless claims came in at 363,000. ADP revised the way it calculates private-sector employment and the release did not move the needle. After four days off, I expected to see a little more action.
European credit concerns will remain subdued. Greece is voting on an austerity plan and it should barely squeak by. It needs to pass so that they can secure their next bailout payment. Spain has not formally requested aid and now that interest rates have pulled back, it does not feel a sense of urgency. The market wants this backstop and it will grow inpatient towards the end of the year.
China’s economy has stabilized and their market rallied 1.7% overnight. Traders liked the PMI and the leadership change should provide a tail wind. Government spending has increased and the PBOC continues to ease. The hard landing will be postponed for a few more months.
The election is a toss-up. Romney has the popular vote, but he trails in key electorate states. If he wins, I believe the market will rally for a couple of days. The euphoria will quickly wear off and the market will falter. If President Obama is re-elected, I believe the market will immediately drift lower. Regardless of who takes office, the fiscal cliff will weigh heavily on the market.
One party or the other will be disappointed and they won’t be in a mood to negotiate. Politicians have had 18 months to find a solution and they chose not to. They couldn’t reach an agreement in 2011 and they put the fiscal cliff in place to force action. Taxes will rise and spending will be slashed to balance the budget.
Standard & Poor’s watched the entire process and they downgraded our credit rating when they saw the chasm between our political parties. Congress will reconvene after the election and a few weeks later they will disappear for Thanksgiving. There is no reason to believe that they will find a solution during the “lame duck session”.
Spending cuts might be postponed, but tax cuts will expire immediately. Capital gains taxes will go up right away and many investors will sell stocks in 2012.
A shorting opportunity lies ahead, but don’t get too aggressive. All it will take is one encouraging statement to spark a short covering rally. In June, interest rates in Europe were spiking and the market was tanking. Conditions reversed instantly on one little statement/promise made by the ECB.
I don’t see any major fiscal cliff statements being made before Thanksgiving. The market has fallen into a pattern where it rallies early in the day and sells off late. I have been shorting these rallies once the momentum stalls and this strategy has worked well. I have been keeping my overnight exposure small. If the SPY closes below $140, I will buy puts.
Tomorrow’s Unemployment Report should be in line and I don’t believe it will result in a big move. Europe will release its PMIs and that could spark a little selling. Earnings season is winding down. Retailers will announce next week. The numbers will be a little light and the guidance will be cautious. Expectations are for revenues to come in below the 2011 holiday season.
Traders are squaring up ahead of Tuesday and I believe the market will stay in a range between SPY $140 – $143 until the election results are in.
I suggest day trading until then. Sell early rallies and cover near the close. Only buy puts if SPY $140 is breached.