Investors who may have fled in fear over potentially massive tax increases associated with the “fiscal cliff” have seemingly not broken a sweat over corresponding spending cuts that are only two weeks away.
THE DETAILS
The so-called sequestration of $110 billion a year in discretionary spending will happen on March 1st if Congress does not come to an agreement. With little indication that Congress is anywhere near a compromise similar to the one that avoided the full brunt of the fiscal cliff, I believe markets could be in full panic mode. However, the post-cliff rally has shown no signs of letting up and the topic, in my view, has gained little traction around Wall Street thus far.
STOCK GAINS
Last week U.S. markets added a seventh consecutive week of gains. Initial jobless claims continue to record lower than forecasted and January retail sales were slightly positive. Housing inventory is down 16% year over year and also showing higher prices in many states across the nation. I won’t call it continued bouncing along the bottom, but optimism right now may increase the possibility that the economy is on the verge of a nice uptick. Global markets ended the week mixed, with Germany showing some continuing weakness, which possibly humbled the other European countries ability to perform. The markets are looking a bit exhausted to me, but the pullback I have been expecting hasn’t arrived yet. Personally, I do expect a pullback to arrive due to the fact that markets don’t go up or down forever. I have a feeling that our sincere politicians are about to lend a hand towards my prediction.
THE TRADE
For a short term conservative trade, I am proposing to buy a March mini S&P 1500.00 put for a purchase price of seven points or $350.00. The risk on the trade is the price paid for the put, referred to as premium, plus all commissions and fees. I am simply looking for the mini S&Ps to decrease in value back down to the 1500.00 level, if not further, by month’s end. It is my belief that the market could see similar price action to what happened at the end of 2012 which resulted in a sizeable selloff before a fiscal cliff deal was completed at the last minute. I don’t believe that the correction coming will be as severe to the drop we saw at the end of December, but enough to potentially make this trade a successful one.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
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What does stock market history suggest for the current rally phase? Read the guest Forbes column by TraderPlanet editor here.
