Budget Deal Fuels Stimulus Worries?

The worry related to the Fed potentially cutting stimulus got another boost today. The belief is the budget deal will give the Fed more reasons to cut stimulus in December. We will find out next week, but in view of that we got a reaction from investors today as to their thoughts relative to the cuts starting now. I guess this puts to rest the belief that the potential stimulus cuts were already priced into the markets. The answer is not yet, but we are working on it. It is hard to price in something that you don’t know exactly what the outcome will be. If the Fed only cuts $10 billion out of the current program there is still $75 billion per month being put to work in the economy? The key is not to speculate, but follow the trend of the markets moving forward.

The S&P 500 index fell 1.1% on the day and that left the index at 1782. Looking at the chart the close was on the 30 DMA and close to what I consider a key support level of 1775 in a micro term (0-13 weeks). A break here negates the break higher in early November and puts the downside test in play. We have been tightening our exit points on short term positions and don’t want to be overexposed to risk. Let this play out and see how traders respond tomorrow.

NASDAQ index fell 1.4% on the day to close at 4003. The 4000 level is more psychological relative to support than the 3951 mark which is the same key level discussed relative to the S&P 500 index. The SOX index fell 0.8% and held up better than the index. The index is key to overall leadership going forward.

VIX index jumped up to 15.4 again today as the fear level rises some on the worries. This is not an overly high level, but we continue to move higher in trading the balance of the week or towards the 18 level then we have some short term concerns about the downside risk growing. The bigger question is how much does it fall? How long does the downside last? Is the sentiment shifting towards a longer term drawback in stocks? Plenty of questions, but little in terms of clarity moving forward as this the first real distribution day in the market since November 7th.

How do we play this from here? Simple… be patient and let the story unfold. We are getting the first chapter of this story with the worry about the Fed cutting rates. How it unfolds at this point is anyone’s guess and I don’t like to guess on investments. The next chapter will be written over the next couple of days as traders and investors determine how much impact the Fed will have over the markets and for how long that event will play out. Watch, observe the data, set your stops according to your risk and time horizon, and take it one day at a time.