Investors vote with their feet as they take to the exits following the re-election of President Obama. The S&P 500 index dropped more than 2.3 percent on the day, breaking support levels along the way. Do we proceed lower and follow through on the downside? Or, do we find support and bounce back into the trading range short term? If Wednesday was any indication of things to come the downside wins. However, the indexes are at support levels worthy of watching short term. Can the politicians talk investors in off the “fiscal cliff”?
On Wednesday House Speaker John Boehner and Senate Leader Harry Reid spoke of striking a deal over taxes as a way of avoiding the impending “fiscal cliff”. If not, the automatic spending cuts and the expiration of the tax-cuts will be a daunting task to overcome in January. The rhetoric from the Senate Democrats to raise taxes on the wealthy proved effective in spooking the investment markets on Wednesday. This is why there is so much concern over how this will be handled and the ultimate impact to the investment markets. Do we get a compromise between the two parties? The almost certain conclusion is a higher tax rate on the “wealthy”. At what level of income defines wealthy will be the issue of discussion.
Qualcomm (QCOM) earning jump beating estimates for the quarter. Yes, back to the reality of putting our money to work versus the talk of politics. The stock jumped more than 8 percent in after-hours trading on Wednesday. They are one of the few chip companies continuing to do well in the current environment. If you look at the chip sector (SOX index) overall it has dropped more than 8 percent since the high in September. There have been recent attempts to bounce off the lows, but thus far has lacked the momentum needed to do so. The news from Qualcomm could lend an upper hand to the chip sector as well as the telecom sector looking forward. SOXX, iShares Semiconductor ETF is one way to track the broader index.
S&P 500 index closed at 1394 on Wednesday. Look for a test of the 1370 level and then a possible bounce as buyers step in for both technical and valuations reasons. If this scenario develops we will play the bounce and let the short term downside play out for the next support level.
Europe was on the back burner simmering. Draghi didn’t like that and decided to add fuel to the Europe fire on Wednesday discussing the slowing growth in Germany and the fact they would go the way of the rest of Europe… down. The current state of the economy throughout Europe was confirmed as dismal. The European Central Bank left rates unchanged, but the comments were not without effect on the European markets and the euro. There are additional concerns relative to Greece’s vote on further austerity programs and the resulting riots. They voted in favor of the new austerity programs, and the fire bombs were thrown in protest. Does this activity create any opportunities around the euro on the recent move. FXE closed near support at $126.75. Does it bounce back as the US issues offset? Does it fall further on the continued worries relative to the sovereign debt and economic stagnation? Watch as this plays out for the opportunities up or down.
The Volatility Index was up as a result of the selling Wednesday. The close above 19 is a breakout from the current trading range and shows the increased concern over stock ownership. VXX, iPath S&P 500 VIX Short-Term Futures ETF jumped 7.6 percent as investors were heading for the exits. One analyst attributed the selling to computers attempting to extract a specific percentage of cash out of the broad markets. Others gave credit to Romney investors taking their money out of the market in belief a Romney defeat spells trouble relative to the “fiscal cliff”. Whatever the case investors were heading for the exits and I expect the volatility to remain in play for the near term. Watch the index as barometer for fear towards owning stocks.
One interesting stat… 12 years ago on the night of the election between Bush and Gore, the S&P 500 index closed at 1431. On Tuesday night the index closed at 1428. That is correct, over the last 12 years the index has return zero percent to investors. Definitely a sobering point relative to returns in stocks.