Still Hoping

The market is weakening, and waiting for a fiscal cliff deal, any deal, even a small one.  The market is like Gerry Cooney, the Great White Hope.  It sort of reminds me of the debt ceiling deadline in August of 2011, when nervousness about a deal weakened the market, with Boehner in the middle of it, just like this time.  Well, we got the deal then, and made it by the deadline, and got a 1% gap up that was faded right from the opening bell, leading to a huge selloff of course not because of debt ceiling nerves, but because there was another lurking disaster that no one was paying attention to: the European debt crisis.

Well, this time, we've got everyone focused on the fiscal cliff, but ignoring the coming Q1 earnings in January which are not far away, and they will be bad again.  Slowing earnings and an economy that will be lacking much of fiscal stimulus will be on its own.  Expect this coming January to be unlike the past two.  I am expecting sharp selling that will take us back down to 1340 to retest that low we made on November 16.  And if that low scares the Fast Money crowd, then it will be a buying opportunity.  But now is a time to look for spots to sell, the VIX has already made its move higher, it is now time for the market to make its move lower, probably after a deal is done.

Sentiment Shift

The well has been poisoned.  There is no turning back now.  Sentiment has made a U turn and investors are not going to jump back in until January earnings are over.  Even with a deal, the market was poised to go lower due to the expectations for weak earnings coming up in January and the extent of the rally over the past month.  I am sure the longs are still expecting a deal, and expecting the deal to ramp up the market, but now the deal will likely be pro-Democrat, which will mean higher taxes than before Boehner's gambit failed.  The market doesn't go up on any deal, only goes up on a deal that is market friendly.  Now that the Republicans blew it, expect a more tax heavy deal than before.

Buying the Rumor

Follow the big money, they knew that a deal was going to happen weeks ago.  Now the retail crowd can feel it, and it is showing up in the price action.  But when you have so much money that is now looking for a deal and to sell a pop on the news, it sets up a potential buy the rumor, sell the news scenario.  Especially if the news comes out and takes us to anywhere close to SPX 1450.  But it is close to the end of the year so I doubt any selloff will have legs.  So it will be tricky to game, but I do think that we'll see a selloff at the beginning of 2013, even with a deal. 

It may just be best to wait for the news to come out to sell, I am sure that short sellers are very cautious here, and the longs seem very eager.  

SPX 1430 the Red Zone

The air starts to get thin above 1430, you can feel the longs get shaky legs, lacking oxygen, the market wobbles.  There are more spontaneous intraday selloffs above that level.   Above 1430, insiders sell zealously. so unless you get hedge funds chasing longs, the supply demand equilibrium favors shorting.

At the other end, you have the green zone, which is 1350.  Below 1350, insider selling is absent, bountiful Fed liquidity starts seeking equities, regardless of fundamentals, and you can't sustain those levels without popping.  There are no crashes in this unlimited liquidity environment.  Crashes are born from financial stress, panic, credit strains,  Not a slowing economy entering recession.  So don't expect huge downswings in the market just because AAPL misses earnings or GDP is at zero.  If we do get a bear market again, it will be a grinder, not a crasher.

Expecting more weakness over the coming days, 1400 is beckoning during opex week, and then when it gets darkest, I assume we'll get a deal announcement late next week that will pop us back to 1430, just in time to crush the put premiums for Dec 21 options.

Fed Protection

In the market, the longs always feel safe going ahead of the FOMC meeting.  There is an unnatural lift and anticipation due to these super easy monetary policies, but eventually the crowd overanticipates.  They overshot to the upside on more Fed insanity, realizing that it doesn't matter if the interest rate is tied to unemployment rate, because the unemployment rate will never get there, or will be manipulated to stay at 6.6 or 6.7 for the LONGEST time.  In any case, I was surprised that Bazooka Ben didn't go for a $60M in Treasury purchases with the $40M in MBS for a round hundo bill a month, just for kicks.  He only met market expectation, which shocked me.

We've had 2 intraday reversals in a row after hitting rally highs,  the market is exhausted and overbought, and one of its catalyst bullets have been spent.  The only one left now is fiscal cliff deal, and that is only a positive catalyst if its a total can kick with payroll tax cut extended.  If there is no payroll tax cut extension, you will have a recession in 2013. 

I can't really recommend shorting in the hole, but you can probably safely short around SPX 1430 for the next few days.  We might even get a decent down day for once and stay down for more than an hour.

Mo Money Mo Money Mo Money

These FOMC meetings happen just like script.  If they go away from the script, it is always to the dovish side, i.e., bigger, longer, more money printing.  After QE3, even the masses have caught on that Ben will never disappoint the market.  He will do at least as much as the media expects, and probably a bit more.  I remember when QE2 was announced, the market expectations were around $500B in bond purchases, he beat the consensus number and went to $600B, Wall Street style!  Right then and there, I knew this guy was a fraud, whose only goal in life was to please Wall Street.  He's Fire Marshall Bill and Smokey the Bear. 

So if today's expectation is $45B a month in Treasury purchases forever, he would go for $50B a month just to beat the consensus number!  He would never think about doing less than $45B because he doesn't want to "spook" the market.  As if a few billion here and there on a 4 trillion balance sheet actually matters. 

Anyway, we're overbought and right around levels right before QE3.  Only this time, everyone is expecting the move, and know Banana Ben will deliver.  I am expecting a pullback on Thursday and Friday, after the Fed does its thing. 

Pricing In the Deal

More and more signs of an imminent fiscal cliff deal is buoying this market.  The hedgies don't want to miss out on the fiscal cliff deal rally, so they are putting a bid underneath this market.  The question is, will retail come in to buy the pop off the deal or just stay away?  More importantly, will the johnny come lately hedgies pile in on the long side after the deal?  No, on both.  After getting burned chasing the market after it popped on QE3, they are going to be reluctant to chase it again here.  Once bitten, twice shy.  I am betting that the fiscal cliff rally will be even fleeter than the QE3 pop.  The market lingered near the highs for a few weeks, this time, I doubt we'll make it past a week on this deal pop.  The market is always forward looking, and earnings will not be far away in mid January, and most will not want to be too long ahead of that. 

We should have low volatility trading till the deal comes out, and then you will see size sellers come out of the woods.

Range Bound

Well, we go the beat on the nonfarm payrolls, but it was a total sell the news reaction.  The past 2 nonfarm payrolls reports had beats, and all went down after the pop.  Investors will not chase here, so you have a hard time sustaining anything above 1420.  Likewise, you have a lot of people in cash, who deploy it when we get to around 1400.  So we should stay range bound until the FOMC announcement next Wednesday.  After that, the market is on its own and I am leaning toward weakness later in the month until the fiscal cliff deal is announced.  The deal should be announced on options expiration week, the money movers always like to have timely moves with options positions on!

BTFD

We are not going to go down much from here.  We may hit 1400, but I don't see anything below those levels sustaining.  The market is too strong considering the fiscal cliff news.  The weak hands are out of this market, but there are a lack of buyers because of the uncertainty, so lack of buyers and sellers at current levels.  Europe is no longer a drag on this market, and neither is Asia.  So you have no global bombs going off anytime soon.  The overseas markets are quite strong, which is being overlooked by the obsession with the cliff.   I would rather be a buyer than seller today, looking for another push back above 1420 in the coming days.

Close to a Selling Spot

We are in a non speculative, non frothy equity market.  Retail has packed their bags and will return after the cliff resolution, no matter what the price.  But non-retail is sensitive to price and they are not dumb enough to chase a fundamentally weak market like this one to near new highs.  Only retail does that.  In a retail-less market, there is only so far a market can go higher on just momentum without fundamental backing.

The disciplined pros will not chase here, and only retail or desperate hedge funds will buy higher.  So that leaves very few buyers willing to pay up, which means the market has to go back down to entice the pros to buy.  Ok, so we have the automated money coming in for early December, but that will last maybe 2 days max.  After that, the market is on its own.  And if we are anywhere around 1425-1430 at that time, it is an easy sell.

On gold here:  this is a hiding place for those that want to be in the market but are afraid of equities.  I see very little upside and plenty of downside for the next few weeks.