Could our politicians actually do the right thing?

S&P500 daily at end of day

Bulls flexed their muscles as Obama and Boehner took the worst off the table.

MARKET BEHAVIOR

Stocks notched a new low in early trade before surging higher following conciliatory commentary between Obama and Boehner.  It made for the highest up-day volume we’ve seen in months.  While we only finished higher by half a percent, the positive reversal was far more impressive when considering the depths we rose from.

One day does not make a trend, but it showed more feistiness out of bulls than we’ve seen in a long time.  That is one of the biggest paradoxes in the markets, the fewer the number, the stronger they are.  Thinning the bull ranks is what finally allowed them to mount a serious counteroffensive.

MARKET SENTIMENT

It felt like a sentiment shift took place as Obama and Boehner appeared to take the worst case off the table.   No doubt there will be hang-ups and elevated tensions over the coming weeks, but it seems both sides are fully committed to brokering a deal in a timely manner.  It won’t be pretty, but it will happen and the forward-looking nature of the market will be looking past the Fiscal Cliff before the end of the month.

Of course this doesn’t mean all is rosy with the world because austerity will undoubtedly be part of the brokered compromise, split between increased tax revenue and spending cuts. But the economy has most likely recovered to the point where it can hold its own without the fiscal and monetary props.

It is entirely possible we’ll see a minor dip in GDP, but addressing the debt and deficit concerns could provide a boost in sentiment and outlook from both investors and business leaders.  We live in a highly leveraged economy and perception about future opportunities is what drives commerce.  Removing uncertainty by putting the deficit on a more sustainable track will no doubt help build confidence, the economy, and ultimately jobs.

TRADING OPPORTUNITIES

Today’s move revealed a side of the market we haven’t seen in a while.  Chances are this is part of the bottoming pattern, especially if politicians continue showing constructive progress toward addressing the Fiscal Cliff.

At this point the spring is wound tight and any positive news could set off a huge short-squeeze.  On the other side, much of the pessimism is already baked into the markets, so it would take a very big piece of bad news to push pessimism even lower.  For these reasons, the asymmetric trade remains owning the market here; it is more profitable to be among the first buying the dip than the last selling the plunge.

Now don’t get me wrong, everything is not right with the world and there will be more volatility before this is done, but for a swing trade the smart money is long this market.  But when the market moves your way, don’t get greedy and lock in those profits before they evaporate in the next pullback.

Stay safe