AM: The party of NO

S&P500 daily at 12:30 EDT

AM Update

MARKET BEHAVIOR
Stocks gapped lower at the open given the high-probability of a govt shutdown, but within minutes bounced and recovered half of the losses.  This dip challenged the 50dma, giving back 50% of the recent rebound, but so far it is holding support.  Two-steps forward, one back.

MARKET SENTIMENT
Ironic how the Tea Party is acting just like a labor union by using extortion to get what they want.  If they don’t get their way, they shut the whole thing down and screw everyone.  They hate it when the other guy does it, but it is okay when they do it.  Of course it would be naive to think politics works any other way.

The unfortunate thing for the Republican party is this strategy is branding them as the party of “no”.  While Obamacare is not popular, most of the public concedes we need some kind of healthcare reform and is hungry for alternatives, yet the only idea out of the GOP is to go back to the old way.  They are missing a golden opportunity to win the public over by providing solutions.  The GOP made huge strides in the ’90 with its “Contract with America”, but that was back when they had ideas.  Now all they look like is crybabies throwing a tantrum.  The public is dissatisfied with Democratic leadership, but as long as the GOP looks worse, the Dems have nothing to worry about.

But enough politics, the early panic never gained momentum and was more of a buying opportunity.  Many traders expected budget problems, but they sold last week, meaning there were few left to sell the news today.  While there might be a few hopeful left that will sell tomorrow when there is no overnight resolution, most of the owners who held through the August swoon are not worried about this temporary budget speedbump.  While it dominates headlines, I have not heard anyone claim the gov’t will remain shut down for months, meaning this is not a major structural problem, simply some political noise injecting temporary uncertainty in the market.

TRADING OPPORTUNITIES
Expected Outcome:
The most successful traders buy fear, not sell it.  The time to sell was two-weeks ago when everyone was giddy and expecting the 100-point rebound to continue to the moon.  Many longer-viewed investors still in the market are probably better served weathering this storm.  No doubt we must stick to our stops, but hopefully any short-term investor with a trailing stop is long out of the market and actively looking for an attractive entry.

Alternate Outcome:
The Tea Party might cut off its nose to spite its face and is the big risk here.  This is a high-stakes game of chicken and things will get ugly if someone doesn’t flinch.  Dems feel the public is on their side and will come out ahead from a shutdown, so they are less willing to compromise.  Obamacare is Obama’s legacy and he will never sign a bill that guts it, so unless the GOP yields, this will get ugly.  We will soon find out if the Tea Party is willing to die for their cause and take the rest of us down with them.

Trading Plan:
The market is holding up remarkably well since the consensus is the gov’t will shut down Tuesday.  This shows a lot of the fear is already priced in.  That likely means we are on the verge of a buying opportunity.  No need to get in front of this thing, but if the market remains stable through a shutdown, that resilience is buyable.  Bears can hold their shorts, but they should look to lock in gains if we don’t crash lower on bad news.  That means most of the negative headlines are priced in and the coiled spring is pointed higher.

Plan your trade; trade your plan