Happy New Year! 2013 was a great year and 1Option will build on that success. The price action will be a little more volatile this year and timing will be of greater importance. We were able to nail every major move last year and I look forward to the challenge.
As I mentioned early in the week, I am 100% in cash. I did not participate in the rally Tuesday and I’m not sweating the decline today. The volume has been light and bullish speculators need to get flushed out. I am not looking for a major decline, but the breakout at SPY $181.50 will probably be tested before Q4 earnings season begins a week from today.
The macro backdrop is bullish and global PMI’s will be released tomorrow. They should be consistent with moderate growth and Europe is the key. Spain’s PMI was better than expected and that has been one of the weaker EU members. I believe Europe could be the catalyst that pushes the market higher into February.
The debt ceiling will be discounted. Both parties were able to pass a budget and traders will assume that the GOP won’t threaten to push us into default. The negotiations won’t get ugly, but they won’t go smoothly either. This will come down to the wire and the rally will stall in February. I believe the SPY could get as high as $190.
The Fed will continue to taper and interest rates will rise. Q1 earnings will be good and the market will make a new relative high in April. The headwinds will blow and the summer pullback could exceed 20%.
Obamacare costs will become clear. Working Americans will pay higher premiums and deductibles will increase. Businesses will see the writing on the wall and their healthcare expenses will go up in October. Some of that burden will be shared by employees.
This will weigh heavily on consumption and I believe the average household will spend $2-$3000 more per year on health insurance. Regardless of the consequences, this program will continue to roll out. Even if Republicans win the House and the Senate, they can’t do anything until they take office a year from now.
If the GOP does win the November elections, the market will rally off of its lows and we could see a year-end rally.
You don’t hear anyone talking about Obamacare and its market impact, so let me be the first to say that it will be the biggest issue in 2014. The cost of the rollout will be much higher than expected, insurance companies will pad their expenses (which are covered by the government) and the cost to individuals will be much higher than expected.
It is true that 30 million Americans will benefit from the program. Unfortunately, they do not contribute much to GDP. Households that have a better than average income will pay for the program. This group does contribute to GDP and consumption will decline. Domestic growth will stall and businesses will postpone hiring until the elections.
So here is how I see the year playing out. We will have a decent start to the year. The SPY will pullback this week and rally into February. The debt ceiling will create a small pullback and we will slingshot higher on earnings in March.
Interest rates will weigh on the market and the costs of Obamacare will become clear. The summer pullback will be fairly nasty and we could see a decline of 20% or more. Healthcare accounts for 1/6 of our economy and the November elections will be critical. We might see a small year-end rally, but we might not make it back to the highs set in March/April.
This could be a very volatile year. It won’t look that way for the first few months, but the downside this summer could get ugly. I am assuming that the government and its insurance partners (HMOs) will be slow to release statistics throughout the year. If the news starts to leak out early, the decline could happen sooner. I like the “sell in May” timeline.
If you are a longer-term position trader with a 1 to 2 month horizon, stay long. You should be in at an excellent price since we bought after the FOMC announcement. The market rallied 6% after the news. You will have to weather a small storm in the next week, but you should be back on track when earnings season begins.
Shorter-term traders that have a 1 to 2 week horizon, you should be sidelined. Wait for bullish speculators to get flushed out. By next week the volume should return and you will have a better opportunity to scale into call positions. If you are trading breakouts and the momentum has stalled, take profits. Use the breakout as your stop.
I am not looking for a nasty decline, just a small wave of profit taking. Support at SPY $181.50 should hold.
Let’s make some money in 2014!