Election Breakout Needs To Gather Steam – Cover Longs Before Friday!

Yesterday, the market took a breather after rallying more than 10% last week. It was able to shake off a dismal ISM manufacturing report that fell to new 26 year low. This morning, factory orders dropped 2.5% and economists were expecting a drop of .8%. Once again, the market has been able to look past the number. Global interest rates continue to fall and Australia lowered their rate by three quarters of a point overnight. The Bank of England and the ECB are expected to lower rates by half a point this week. Credit spreads have been improving and the monetary initiatives around the world are helping. The market has priced in an Obama victory and an election rally has set in. Uncertainty makes everyone nervous and regardless of how you voted, the market is prepared to deal with the outcome. My biggest fear is that corporate taxes will go up. US corporations are at a competitive disadvantage due to high labor costs, health insurance, EPA/OSHA/Sarbanes-Oxley regulations and the second highest tax rate in the world. As a result, capital expenditures in the United States continued to decrease. If our government penalizes corporations in any way, they will simply move their headquarters to a tax friendly country just like Halliburton did. If Democrats win both the House and the Senate, a nasty decline could result tomorrow. The market is not expecting this and it would destroy the political balance of power. The SPY has broken out above 100 and that is significant if it can materially close above that level today. If it does so, shorts will get squeezed and they will fuel the next leg of the rally. I don't believe we have enough gas in the tank to fill in the gap from the first week in October. They have a legitimate shot at SPY 110; we would need to close 60 points higher on the S&P 500 today. Time is of essence because Friday's Unemployment Report will cast a dark cloud over this market. I am long-term bearish and I don't want to get too cute playing this rally. That's why I've focused on selling out of the money puts. The implied volatilities continue to collapse and I have not shed a drop of sweat using this strategy. By Thursday, I plan to buy in some of my puts that are trading for pennies. With two weeks left to go, anything can happen. If we do rally to SPY 110, I will take a small short position going into Friday's number. For today, the early momentum has been established and we are above minor resistance. I expect to see a rally into the close.

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