Fear is Rising Relative to the Outlook

The Congressional Budget Office released a new assessment of the ‘fiscal cliff’ that is approaching the US. If fact, it does a good job of showing the impact of what averaging a 1.4 trillion dollar deficit for the last three years will do to a balance sheet. The good news is this year’s deficit is only 1.1 trillion dollars, however in ten years it will be equal to 90% of GDP. For kicks and grins it also states projections for 9% unemployment, GDP will fall 0.5%, and there will be a recession in 2013. Maybe that data overshadowed the FOMC news of more stimulus on Wendnesday… only if the economy doesn’t show sustainable growth of course.

This all seems more like going to the circus and trying to watch what is going on in all three rings at the same time. Last week we were trading higher on solid earnings data and hope of an improving economic picture, this week we are focus on stimulus again from the Fed and armageddon from Washington. Amazing how things can shift based on the data when the fundamental growth of the economy stinks. All of the headlines this week are putting fear back into play. The stimulus talk is pulling the dollar lower and pushing commodities higher. Money is in full swing towards where it will be treated the best and that is bonds, the euro and commodities.

The stimulus has been factored into the current move and until now we have no action taken by the Fed only talk and promise of stepping in should the growth not materialize. If we are talking about job growth they need to act now. If we are talking about economic growth the 1.7% GDP growth isn’t getting it done for jobs, but it is growing. The last three years of stimulus hasn’t produced much in terms of sustainable growth, it is unlikely more will change the course we are tracking.

The market has painted itself into a corner with the stimulus promise. With the FOMC meeting in August being the target for action, it came and went with no action and it shifted it’s sights on the Jackson Hole meeting as a time for action. That doesn’t seem to be panning out, and the next FOMC meeting is September 12th… if not then maybe the end of October meeting (oh the election? How quaint!)… or November… You get the picture. Now the FOMC minutes shows they are ready to act… sometime, the market will eventually react on the downside or put the momentum in neutral and wait. I discussed this over the last month that the promise has been made and investors are now looking for action.

The action is coming in commodities. Oil has moved higher on the weaker dollar. Gold has rallied on the inflation expectations from the stimulus globally and Treasury bonds are moving up as the fear factor steps back into the picture. Bottom line – this is stirring up uncertainty looking forward and the market hates uncertainty. We have to step back take a deep breath and put in place a plan of action relative to what does happen, not what can happen.

For example, the S&P 500 index has attempted to break above the 1420 level and failed this week. Looking at SPY, you have support at $141 and $139.25. Decide which exit point works for your outlook and set your stops. If you want to look longer term the 50 day moving average is defining the uptrend trend currently and would be a good exit point. Your time horizon and risk tolerance will determine your exit strategy, the key is to have one.

I am not good at speculating what will or will not happen. As a result, I have become good at setting my exit points defined on my risk tolerance. Based on the current emotions and speculation brewing it is time to set you plan in place and see how this plays out short term. The greatest challenge for investors is selling positions from their portfolio. If you determine that when you buy the position it becomes much easier to determine where the exit points are.

One day at a time and let the story unfold… don’t be a fortune teller!