Details of any deal that addresses the fiscal budget issues are still not available as both sides continue to argue about what is fair and reasonable going forward. All give and no take is the problem currently. Unless there is some takeaways and a resolution reached, the automatic tax increase and spending cuts will go into effect. If by some Christmas miracle a deal is reached the broad markets could rally an additional 5 percent before year end. However, if no deal is reached selling risk could be equally deep on the downside if not more. In the end however, the devil will be in the details of what deal is reached. Thus, the markets reacted again on Thursday as both sides cannot make any progress relative to a compromise on spending cuts as well as tax increases. Each day that passes only adds to the anxiety at this point.
The Fed agreed to keep interest rates at or near zero until the unemployment rate reaches 6.5%. Does this really do anything to stimulate or help the economy? Relative to lending the answer is no as the spread between what the banks can lend money for and the current yields is not profitable. Thus, less lending for small business growth. The banks are more interested in credit card lending at 16-23% rates versus the business owner or even real estate for that matter. The bottom line… the Fed cannot borrow its way out of debt any more than you or I can. History has shown us this method can’t be done, but Bernanke believes he can be the first to accomplish the feat, and may bankrupt the US in trying to accomplish what has never been done before. Zero percent interest rates are not helping the retirement community either as they struggle to make money on assets to provide stable income for retirement. This has sent money into higher risk asset classes in an attempt to keep pace with spending needs and inflation. The answer to the question of who benefits from zero percent rates? The wealthy corporation and individuals who can use it to monetize assets by fattening their balance sheets. The rest are left on the outside looking in. The Fed policy simply put, isn’t working. Just look at the result in the economy since 2009.
The NASDAQ fell 21.6 points to 2992 and back below the 3000 mark again. The index did manage to hold the 200 day moving average on the close. However, this was a test of investor resolve as we inch closer to the end of the year. The volatility on the NASDAQ did move above the 19 level on VXN. If this picks up we could see some selling accelerate again on the index. Watch how we trade today both in range of price and volatility. It is key to hold support short term if the upside is to continue.
The S&P 500 index fell 9 points to 1419 or near support we discussed yesterday. Energy, Healthcare and Technology were the downside leaders. Watch the support levels here of 1420 and 1405 if we continue lower today. The volatility picked up in the index as well with VIX moving to 16.5. We will post potential plays in VXX if the volatility and fear over the fiscal cliff continue.
There are no clear indications of a sell-off coming, but with the current market environment and the overhang of the fiscal cliff we have to be on our toes and manage our stops accordingly. Watch the open today as the futures are currently higher on good news in China. This could be temporary and we resume the selling from yesterday as the day progresses. The economic data today is focused on inflation which will not be a driver unless there has been a big increase over last month. With oil prices dropping as well as gasoline that isn’t likely to take place. The focus will be on the investors psyche as they will control the outcome on the day.
We continue to take it one day at a time with eye on the downside risk building around the Washington Tango. Stay focused and be disciplined.