Today’s Market Lessons

Let’s first start with a interesting lesson on irony… The food stamp program, administered by the US Department of Agriculture, is proud to be distributing this year the greatest amount of free meals and food stamps ever, to 47 million people. (most recent figures for 2013.) Meanwhile, the National Park Service, administered by the US Department of the Interior, asks us “Please Do NOT Feed the Animals.” Their stated reason for the policy is because “The animals will grow dependent on handouts and will no learn to take care of themselves.” That is truly some “food” for thought relative to the irony of our government.

Lesson number two… a watched pot never boils. The headlines continue to focus on what action, if any, the Federal Reserve will take at next weeks FOMC meeting. The Fed Presidents are in their quite period prior to the meeting (peace at last). The economic data is out and the wait is on. The challenge for investors remains a cut in stimulus and the potential impact to the economic picture. GDP for the third quarter clocked in at 3.6%, but the lack of faith in it being real has not instilled any confidence from investors. The biggest question is whether they (the Fed) will cut, if they do, how much and has the market priced this in currently? Any answers to those questions is purely speculation and not my cup of tea. However, you can watch how the market trades heading into the report from the FOMC meeting and it will give indication of what investors believe. For now they are showing uncertainty and a lack of concern meaning it could go either way.

Lesson number three… more regulation for the financial services sector as the Volcker rule is finalized! The most interesting comment came from one of the Senators concerning the 982 pages that make up the rule… “America’s financial system will be safer now.” Really? Just like the Affordable Care Act, what is in the details will now come out and it will not be what has been portrayed in the media and in Washington. The cost of compliance and oversight will be pushed on to the end consumer as usual. Don’t you feel safer already? After all the rules needed to avoid the 2007-08 financials collapse were already in force. The challenge? Enforcing them! The biggest question will be the impact to the price of the stocks in the sector and how it will impact earnings and revenue going forward. This uncertainty may already be priced into the sector, but it warrants monitoring going forward.

Lesson number four… earnings don’t matter when pushing the price of a stock to a new high. Twitter hit another new high today hitting $52.10 and up 5.8%, that of course was on the heels of gaining 9% on Monday. For those analyst who think Facebook and LinkedIn are overvalued, what does this say about Twitter? I bet the pricing of the shares at $26 seems stupid now to the board of directors who left billions of dollars on the table for the company to use to expand their business. For those of you who own the stock, congratulations. The key is keeping your gains and you need to manage the risk of the position going forward.

Lesson number five… no volatility in the face of uncertainty is positive. The VIX index is still near the 14 level and has not shown much interest in breaking higher. This complacency by investors gives insight into lesson two above. If the fear of the Fed is in play, it is minimal fear and that is a positive sign moving forward. If the volatility index picks up momentum into next week I would take that as a negative. We could add to the potential worries moving forward the budget negotiations which have managed to stay out of the headlines. We discussed this in the weekend update that those negotiation end this week and a vote of approval must take place by January 15th to avoid another government vacation, I mean shutdown. Until investors show signs of worry and exiting stocks it is steady as we go.

We have been discussing the bottoming effect in gold the last week and today it decided to bounce in earnest. The metal gained $28 or 2.2% on the day. This puts GLD at $121.82 and above the $120.50 level we discussed last night at a trade entry point. One day does not make a rally, but you have to start somewhere and if we get a confirmation or follow through on the move, a target of $131 is a worthy goal. Remember there is plenty of uncertainty surrounding the outlook for the metal and risk management is vital to any positions taken.

Crude oil has been another commodity of discussion breaking higher last week. The speculation remains on consumption/demand eating into the inventory surplus. Tomorrow is the data released from EIA and it will be watched closely. The price of crude was up $1.31 or 1.3% on the day.

As we note every day, the market is a risky place to park money and thus requires management of the assets both short and long term. Stay focused, remain disciplined and take it one day at a time for now.