PM: Fiscal Cliff here we come

By Jani Ziedins | Intraday Analysis

Dec 20

PM Update

MARKET BEHAVIOR

Stocks traded flat for the first half of the day, but rallied into the close on above average volume.  This was a nice win for the bulls, but all seems for naught as overnight futures are down sharply after conservative House Republicans rebuffed Boehner and his Plan B.  These dysfunctional developments make it less likely we’ll reach a workable compromise before yearend.

MARKET SENTIMENT

If the drop in overnight futures holds into Friday morning, we could see a wave of emotional and stop-loss selling hit the markets.  For many traders this will be a sell first, ask questions later situation.  But the big question isn’t how we will open, but what will happen in the second hour of trade.  Will value investors jump in and take advantage of the newly discounted shares, or will buyers prefer to wait and see how low this will go before stepping it?  No doubt we will see sellers in the morning, but the ball is firmly in the buyers court as to when they chose to prop up this market.  If they step back for a couple of days we could see a noteworthy slide in stocks as they fall in the vacuum of absent demand.

But here is the thing, the Fiscal Cliff is an event created by our politicians and it will be solved by our politicians.  This is not a sub-prime lending scheme that is about to collapse the global banking sector.    This is simply our politicians kicking a can down the road.  Maybe US debt will be downgraded by a ratings agency or two, but paradoxically this will probably  lower our federal borrowing costs as traders seek shelter in US Treasuries.

TRADING OPPORTUNITIES

Watch early trade to see how buyers and sellers respond Friday morning.  The 1.7% dip in overnight futures might even mark the low of this event.  After-hours and overnight markets are far less liquid than the primary markets, so a few panicked sellers can have a far more dramatic impact in these markets before cooler heads prevail at 9:30 in the morning.  Or not…….

Watch early trade for signs of selling accelerating as the floor falls out from under the market, or alternately buyers step in and we rally off the early lows.  Fundamentally this is largely a non-event, but the media has done a good job of hyping this up that could lead to a wave of emotional selling. But I love emotional selling because that is how we make money.

The same ideas hold for Friday as they have all week.  Long-term holders, don’t lose your resolve.  You knew this volatility was a real possibility, don’t lose you nerve now.  Short-term traders don’t try to catch the falling knife.  Wait for a bottom to form before buying discounted shares.  Shorting would still not be advised because this market could bounce at any time.  If you simply must short the market, don’t hold for more than a couple of days, which would be hard given the upcoming calendar.

INDIVIDUAL STOCKS

AAPL will likely get caught up in any selling, but none of this changes the fundamental story.  If AAPL was attractive at $525, then it is even more attractive at $495.  Trade your conviction and don’t let near-term volatility spook you out of a good trade.  We knew this could happen, we accepted the risks when we thought about it rationally, and now we must come face to face with these risks when the market moves against us.  But whether it is in AAPL or anywhere else, if you are uncomfortable, sell, regroup, and wait for the next trade.  Always live to fight another day.  If that means selling at the bottom, so be it.  There are old traders, there are bold traders, but there are no old, bold traders.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.