PM: Sequester time

By Jani Ziedins | End of Day Analysis

Feb 28
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.


Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.


The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?


Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.


AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

Stay safe


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.