Too much talk about the ‘fiscal cliff’. Yes, it is a concern, and yes, it would be disruptive to the economic system. Yet, even if Congress agreed today to a new budget and spending cuts, the problem would not go away. It would delay the real issues, excess government spending versus tax receipts. Until we have a mandatory balanced budget act the problem will remain. Yes, eventually we will default like Greece and Spain because we can’t pay the interest on our debt at the current rate. It is not for a lack seeing the problem, it is an unwillingness to make the tough decisions to deal with the problem. Until we get there it is only a matter of time. You cannot cure the disease until you admit you have it.
With that in mind, how do we approach a holiday shortened week of trading? First, the response on Friday towards the “hopeful” resolution to the budget mandates by year end. There were more comments over the weekend about there being an agreement in principle to address the issue at hand adding to the optimism. The optimism is related to a temporary fix that allow investors to believe it will be okay short term to remain invested in stocks, not a solution to the long term problem. Thus, we are looking for a bounce on Monday as a positive response to the optimistic talks… nothing more.
Second, can we trade or invest in the bounce? That is the real question at hand. It should be tradable depending on the level of belief by investors that the talks will result in action near term. I view the bounce as an opportunity to exit positions that are not keeping pace, if you have not already done so, and to trade positions that are oversold. We have updated the Watch List for the week adding some plays based on the current activity. Now is a time to be patient, let the market/investors work through their collective emotions, and find the direction they believe in going forward.
Third, the downtrend is in play. Words or promises from politicians aren”t going to be enough to change the trend, there will have to be definitive action. Remember the market trades looking forward. Currently there is a fiscal budget problem that is in the middle of the road. It has to be removed and a clear understanding of what is on the horizon before investors are willing to accept the risk of owning stocks longer term.
Thus, as we approach this week of trading we do so cautiously. The opportunity is based in the belief that Washington will find a solution to what is being built up as a tremendous short term problem. If the belief in the resolution prevails look for a move back towards the 200 day moving average as the initial move, and if the optimism really builds a move to the 1400 level on the S&P 500 index.
I see the move as nothing more than a trading opportunity. The talk has to become action in order to produce much more, and according to Mrs. Pelosi that may not happen until Christmas. That is an eternity for investors, and it leaves to long for minds to be changed and deals to broken. The longer it takes the less optimism currently to impact the upside of the markets. You will have to excuse me, and the majority of Americans if they don’t trust Congress to do the right thing until they have postured, argued and frustrated everyone.
Be focused, be disciplined, and take what the market gives, one day at a time.