How to trade the Fiscal Cliff market swings
The churn continues. Senator Donkeybutt says the fiscal cliff talks are going pretty well. Markets up a bunch. Congressman Elephantbutt says he’s not encouraged by the fiscal cliff talks. Markets down a bunch.
Sure is starting to feel a lot like a fast-motion version of the playbook we have used so successfully for the last few years of buying every time the markets crash on “Euro-debt crisis grows” headline domination, and trimming every time “Euro-debt crisis abates” headline dominates the headlines. If the swings we’ve been riding in the markets from those Euro-debt headlines have been measured in weeks, these “Fiscal cliff” are likely to be measured in days.
That is, look for the markets to sell off 2-3% over a span of a few days here and there when the headlines go crazy over “Fiscal cliff crash coming” and then rally 2-3% over a span of a few days here and there when the headlines try to convince you that the “Fiscal cliff is going to be resolved”.
All that said, the main driving force underneath this market remains the continued government insistence on corporate earnings growth at any cost. 0% interest rates, targeted tax tricks and exemptions for major corporations, QEInfinity, and stealth stimulus are likely to continue to fuel corporate earnings growth and continue to force savers into riskier asset classes like growth stocks. That means that for the next couple years or so, the path of least resistance for the stock markets in general probably remains higher. And thusly the near-term continued strategy of buying weakness and trimming on strength.
When the set-up for corporate earnings and the markets turn bearish again — and they will, as they did in 2007 when I closed my hedge fund and got out of the markets because they looked ready to crash — we’ll want to “Flip It” on our trading approach such that we’ll look to short on rallies and cover on crashes. The top will likely come for both the economy and the stock markets when selling and getting short seems like the hardest trade and stupidest idea of all-time. That’s what it felt like in 2007 when it topped last time.
And do you remember how it felt like stocks would continue crashing forever back at the bottom in 2008? As I wrote in an article called “Don’t panic now that we’re here” –
The economic news is horrible. The earnings news is horrible. I wasn’t joking when I screamed last that there was absolutely no way that GE would keep their dividend this year back when Immelt said it was safe last month. It wasn’t. But that’s also now reality and that reality is now priced into the market.
I still wouldn’t touch GE or any other company that’s become dependent upon welfare infusions or welfare guarantees from TARP, the Fed, Treasury, TALF, etc.
But as I proposed to Ron Paul, Peter Schiff and Judge Napolitano on Strategy Room yesterday — we might want to consider the idea that all these trillions of worthless dollars that the government is injecting into the economy might actually provide some fleeting, temporary, illusory cushion of economic activity.
The time to freak out was at DJIA 14k and the millenials on Happy Hour were telling us that they could and should demand nap time in their contracts because there’s so much more demand for their labor than supply (true story!)
Our analysis and the “feel” of the market are more like mid-cycle than a top in the cycle right now. That doesn’t mean the economy or stock markets are immune to crashes, black swans, natural disasters, rampant fraud discovery or for any of a thousand other reasons, many of which reflexively feed off each other. But trading, investing (and even gambling) is about maximizing your upside and minimizing your risks via hard, objective analysis.
No trades for me today. I’m likely to wait for another crash or another spike to do much more.
Don’t forget we have this week’s Live Q&A Chat at 2pm EST at http://tradingwithcody.com/chat. If you can’t make the Live Q&A, just send your question via a reply to this email or to support@tradingwithcody.com and I’ll get it included in the transcript we send out tonight.
