Yesterday, the market tested the downside early and the low from two weeks ago held (SPY 142.60). Stocks rallied late in the day and we closed above SPY $143. This morning, the S&P 500 is down 18 points before the open. Critical horizontal support will be broken and I will exit bullish positions.
The fiscal cliff is starting to take its toll. Politicians were not able to reach an agreement a year and a half ago and they have not made any effort to revisit the budget since then. The deadline is approaching quickly and nothing will get done before the election.
Last week, President Obama said that he will veto any plan that does not hike taxes for the rich. Both parties need to cooperate and that type of rhetoric is counterproductive. During last night’s debate, he said that sequestration will not happen. After the debate, he retracted that statement. I’ve heard analysts estimate that GDP in 2013 could fall by as much as 5% if all of the provisions are implemented.
Corporations are waiting to see what will happen. They can’t plan for the future if they don’t know this part of the puzzle. Business investment is soft and guidance for next quarter has been extremely cautious.
The presidential election is a dead heat. Each side will take the country in a different direction. CEOs hate uncertainty and so does the market.
It seems like fear lurks around every corner. If it’s not Europe, it’s China. If it’s not China, it’s the debt ceiling. The bottom line is that Asset Managers will wait for certainty and they are not overly concerned that they will miss the year-end rally. If stocks pull back dramatically, they will nibble.
All of the other pieces were in place for a year-end rally. The EU/ECB has been active and European credit concerns have subsided. Economic conditions in China are improving and easing/fiscal spending will continue. Corporate profits are good and cost-cutting has preserved the bottom line. When we do get top line growth, profits will expand quickly. Valuations are attractive and balance sheets are strong.
It’s no surprise that revenues are light and guidance is cautious. There have been many warnings. We need to get through the election and the debt ceiling. Until then, the bid will be passive.
This morning we will break technical support. That will flush out bullish speculators and SPY $140 will be tested this week. If you are nimble, trade the downside and use stops.
I will be exiting my positions. My first priority is to get flat. I will monitor the price action and then I will determine the next course of action.
I believe the selling will be heavy and we will see a small bounce in the first hour of trading. As the day progresses, the market will slip and we are likely to close on the lows.