Random Thoughts: Washington Takes Over Wall Street
It's maddening but not at all surprising.
With the government shutdown looming, the S&P (INDEXSP:.INX) entered this week precariously perched on the 50-day moving average; it was sort of a big deal as it was the first of a few levels of layered support that include S&P 1660 (the 11-month old uptrend) and S&P 1592 (the 200-day).
Given how long it's been since we had a (gasp!) 10% correction -- the economy being so strong and such -- the stars were seemingly aligned for the bears to stair-step lower.
Of course they were.
On cue, and consistent with the path of maximum frustration, the tape rallied higher, due in equal parts to short covering, Turnaround Tuesday, and Crash the Cat's Fifth Birthday (who got a bowl full of fresh turkey last night as a consolation prize). Say what you will about what happened and why, the Russell 2000 (INDEXRUSSELL:RUT) notched a fresh all-time high into the close. Take that, Karl Marx.
Turnabout is fair play -- there are always two sides to every trade -- so we shouldn't be surprised to see the S&P lower this morning, wiping out yesterday's gains and again testing the 50-day moving average. Technical levels weaken with each retest (as supply or demand is absorbed on each subsequent probe), so the odds of a break this time are incrementally higher than they were yesterday.
Now to the issue at hand: We don't "do" politics at Minyanville unless it impacts the price action of the marketplace, or at least that's the goal, allowing for some butterflies to sometimes slip through the net. As a registered independent -- fiscally conservative and socially liberal, a posture seemingly shared by more and more folks these days -- I'm as equally saddened and frustrated by the political infighting. But I am not, in any way, shape, or form, surprised.
We've been fingering the "other side" of policy for many years, the "tricky trifecta" of societal acrimony, social unrest, and geopolitical conflict that has permeated our lifestyle, widened the income gap, and poisoned our culture. Many will argue that our view has been rendered inconsequential due to the steady ascent of stock prices, although I would argue that the causes and effects have been, and will continue to be cumulative.
The venom between the Blue and the Red is a natural extension of what many of us have felt for a long time; while the stock market reflects the best economic prospects of all time, the underlying condition has been deteriorating at its core, at least for the majority of people. Once upon a time it was masked by the lower dollar and skewed by the spending habits of a slimming margin of society. Now, it's a one-trick pony, rewarding the "haves" and sweeping over everyone else, a modern-day "let them eat cake" moment.
I'm not on some high horse; this isn't "fun" to talk about nor is it particularly popular, but the discussion must take place if we're to arrive at a solution. We've long offered that the unfortunate but unavoidable solution is to raise taxes (be it sugar tax, the legalization and taxation of marijuana, marginal increases for the wealthy) and cut spending. That is fiscal responsibility at its core, and given the size of the hole we've dug through the many years of societal largesse, we need to be lucid and honest about what needs to be done to fix it; if not for us, than for our children and perhaps their children.
Unfortunately, while the social mood climate is in many ways rational (people are angry and rightfully so), the manifestation is acutely dangerous. If policymakers and politicians don't get their acts together and stories straight -- and quickly -- the budget impasse will bleed into a debt-ceiling debacle and fuel the fire of foreign holders of dollar-denominated assets and debt. Remember, the world blames the US for the first phase of the financial crisis and they already have their finger wagging in this direction. That smacks of a multitude of unintended consequences through political, financial, and social lenses.
What can we do?
As people, we can maintain level heads, teach our children the difference between right and wrong and the value of a dollar, and strive to be part of the solution when everything around us screams "take care of ourselves."
As traders, we should manage risk rather than chase reward, lean against our levels, and remove emotion from what promises to be a very emotional year-end stretch.
As investors, we should understand that we're already five years and 150% into this "recovery," and while it can conceivably continue, we would be wise to remember the persistent pattern of savers being screwed at bottoms and investors being punished at tops.
For, as Mark Twain famously said, "History doesn't always repeat, but it often rhymes."
This is my fifth week on my self-imposed no-booze kick (sans a glass of wine or two on occasion). This very well might morph into a lifestyle decision as the benefits of not drinking seemingly outweigh the benefits of drinking.
For the record, I was kidding when I mused on Monday that given how dysfunctional the government is, a shutdown would be viewed as a net positive.
Eleven years of real-time writing in the ‘Ville; we sure have gone through a lot together, eh?
- Gold is smelting and I've attached two charts; the first is the correlation between gold and the S&P and the second is an emerging head & shoulders pattern. If gold breaks $1,275, it "works" to $1,115 in a technical vacuum, which happens to be in and around the June low.
The best part about being A.D.D is that I can watch The Soprano's again and it's all new to me!
What is Minyanville?
Goldman (NYSE:GS), JPMorgan (NYSE:JPM) $50, and Deutsche Bank (NYSE:DB) remain my primary proxies in the banking complex while BKX (INDEXDJX:BKX) 62 (the August low) is the technical toggle.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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