Stocks slipped as traders fretted over the impending Congressional votes and potential govt shutdown. We dipped under 1690, but early weakness didn’t trigger a cascade of stop-loss selling. The market is nervous, but not panicked and we are only 2.3% from recent highs.
The half-full view is holders are confidently sitting on their positions, knowing this is the wrong time to sell. The half-empty view is such a small pullback means there is still tons of downside left. The truth probably lies somewhere in between.
Only the extremist thinks the US Govt is on the verge of going out of business. Most rational traders expect the debate will be heated and ugly, but in a few weeks it will be ancient history. There is little doubt Congress will increase the debt limit because they have no choice, the fear is how long this drags out.
In reality, this is just a bump in the road that comes up every couple of years. Sometimes it slips under the radar when it is rubber stamped. Other times political parties use it to extract concessions for programs they disagree with. Right now the GOP is threatening to go nuclear over Obamacare. The question for the market is if this is just political posturing and a negotiating tactic, or if the GOP is actually suicidal and willing to drive the car off the cliff. That is the main source of uncertainty here, but this is nothing close to the structural problems we had in 2008 with the Financial Crisis. Our politicians will figure something out and the market will rally on the relief. Then it is on to the next worry, likely a return of Taper headlines.
One of the things that keeps this pullback more constrained is many of the weak jumped out in August’s selloff. Those that fear Debt Ceiling are likely afraid of the Taper too. That means most of the potential Debt Ceiling sellers are already out of the market. No matter what the headlines say, we need people selling stocks to push the market lower and so far few are selling these headlines. Trade people and their portfolios, not the headlines.
The market is holding up relatively well given the headline risk. Either owners are oblivious to the dangers, or the fearful have already bailed out. The August dip cleared a lot of dead wood, meaning there is less to get rid of this time. Likely this pullback is just a little cooling off following the sharp 100-point rebound. The Debt Ceiling will be ancient history soon enough and these discounts are buying opportunities.
The Tea Party’s hatred for govt spending and Obamacare is the wildcard in the mix. Do they have enough influence in the GOP to shutdown the govt to prove a point? We will soon find out. While the risks of driving off the cliff are great, the probabilities are slim. This creates an interesting “black swan” trade. Buying some cheap, out of the money puts is akin to playing the lottery. The chances are winning are slim, but the rewards are great.
The market is holding 1680 as expected (50% retracement of recent gains) and is closer to a buy point than a shorting opportunity. The longer we hold these levels, the safer it is to wade in despite of the headline risk. Bears have the wind at their back, but still cannot get the job done, meaning they are far weaker than most realize. Plan ahead of time where you will buy and sell and stick to that plan.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.