The new theme song in Washington is now the revised seven dwarfs tune… “I owe… I owe… so off to raise taxes I go… ” As we stated in our updates last night the whining and complaining has begun. Both parties are blaming the other for not getting serious about working together towards a resolution. The champion on this bipartisan negotiation has to be the President! Running out to speak to voters isn’t going to get anything done to resolve the current budget issues. Stop talking and start working on the problem. The longer this goes the worse the potential outcome will be. That said, this is the concern many analyst and investors have relative to the markets. They will react as they did yesterday to the fighting. Investors want some certainty and confidence that their is a compromise in the making and that both parties will make some decisions that work for the good of the country, and not just one persons view.
A test to the 1385 level on the S&P 500 index may very well be in play based on what we are seeing near term. If we do test and hold, the bounce would provide the entry points for any upside plays short term. If the test fails, and we retest the lows near 1355 we will have to see what the catalyst and drivers are before making any short term decisions. The bottom line is we have to develop some patience and take what the market gives one day at a time.
The key from my perspective is to not get caught up in the chatter about what all the changes will mean to stocks. As we have seen with the Utility sector over the last month, the potential change in tax rates on dividends prompted selling. No action has been taken, just an assumption of what may happen. However, we now have some support finally on XLU near the $34 level. As this builds a base the upside should be a possibility, but the dividend of 3.89% is also attractive when you consider the intermediate term corporate bonds are yielding 3.2% in VCIT. Higher dividend with potential upside is attractive for this sector. Thus, we have added it to our watch list currently. Thus my point, the noise is creating opportunities as investors react to the uncertainty of what could happen versus what will happen. Stay focused and keep your head while others are losing theirs. Until the politicians act and set new law, it is all speculation.
On the webinar last night we discussed our new TWO EGG model, and the opportunity to pair trades. The current market environment is setting up opportunities to pair trades relative to the speculation in Washington. If you haven’t reviewed this new model there is video available on the home page. If you track the ten year Treasury bond in comparison to utilities they should move in correlation with each other. When we have discrepancies is where you have opportunities. That is in place currently and worth watching for the resulting trade.
As investors we still have to be very cautious near term. The level of uncertainty is a growing concern. There was a reversal in the VIX index the last two days. Not huge, but enough to watch. Treasury bonds reversed the selling and bounced on buyer interest or flight to safety picking up again. This can all be part of the test or pullback in the bounce… or it can be a concern and retest of the lows. One day at a time, one worry at a time and a focused discipline in managing our money. Sometimes it is better to be an aggressive chicken in the market.