The Market Is Closed. Look For Choppy Trading With Negative Bias

October 29, 2012

Frankenstorm is bearing down on New York City and the market is closed today. The S&P 500 was down five points before they halted electronic trading.

Uncertainty has gripped the market and Asset Managers are not worried that they will miss a year-end rally. The bid has weakened and this could be one of the few years where the market does not march higher during the last quarter.

The election could swing either way. A Romney victory would be “market friendly”, but the cheering will fade quickly. There are many issues that need to be resolved.

The fiscal cliff is the first priority. One party or the other will be disappointed and they won’t be in a mood to negotiate. Congress will barely reconvene and then they will disappear for Thanksgiving. Politicians could dig their heels in during a lame-duck session and we are likely go over the edge.

This event should have been addressed during the last 18 months and both parties ignored it. They couldn’t reach an agreement in 2011 and our credit rating was lowered by Standard & Poor’s as a result. There is no reason to believe they will find a solution in 5 weeks. If all of the provisions are implemented, analysts believe GDP could drop 5% in 2013.

CEOs are worried and they are holding off on investment decisions. They need clarity and guidance for Q4 has been disappointing. The quarter is off to a slow start and conditions are deteriorating. This has prompted investors to take profits.

The market has a way of forcing politicians to take action. Washington will drag its feet until the market tanks. Eventually, they will figure out how to kick the can down the road. Unfortunately we need a market selloff to coerce politicians.

European credit concerns have subsided, but Spain needs to formally request aid. The market has been patient and it waited until the election results were in. If they don’t take action soon, yields will start to climb. I don’t believe European credit concerns will be an issue in 2012.

Economic conditions in China are improving. This week we will get the official PMI and it should be in line with the flash number last week. Industrial production, retail sales and exports all exceeded estimates. There is still some squabbling over the leadership change and that could become an issue if it continues. The PBOC will keep its foot on the accelerator and they should be able to postpone a hard landing.

Economic conditions in the US have been improving. ISM manufacturing, ADP and the Unemployment Report should be decent this week. Market friendly economic releases will slow the bleeding, but I am still expecting selling pressure this week.

Look for nervous trading with a downward bias. Stocks have been selling off late in the day and that is a bearish sign. I believe SPY $140 will be tested this week. That is a horizontal support level, it is a psychological support level and it is the 100-day moving average. If that level fails I will buy puts.

Bullish speculators will get flushed out if SPY $140 is breached and we could see a quick selloff after the election.

This week I will be shorting rallies early in the day. I believe decent economic releases will spark early buying and that move will quickly be exhausted. Stocks will decline later in the day. I am keeping my overnight risk exposure small and I am focusing on day trading. Below SPY $140, I will start to carry some overnight bearish positions.

The market could be closed tomorrow as well if the storm damage is significant. Use this time to line up candidates.

My thoughts and prayers are with all of you on the east coast.
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