Good News This Morning. Stocks Should Grind Higher. Day Trade and Keep Overnight Risk Low.

December 13, 2012

Stocks are trying to push higher on seasonal strength and optimism that politicians will strike a deal. The price action this week has generally been positive, but don’t look for a runaway rally. If the market gets overextended, we are likely to see selling. Some Asset Managers are trying to reduce risk into year-end and they will contain the excitement.

The overnight news was good. Greece secured its bailout payment and that was largely expected. The more substantial release was that European officials agreed to a centralized banking authority. They started talking about this a year ago and they finally came to terms. This is just the framework, but it is a step in the right direction.

The centralized banking system does not address sovereign deficits or structural debt problems. These issues will continue to grow. This morning the U.S. Treasury said that it will continue its swap program with the ECB. We will exchange US dollars for Eurodollars at a very favorable rate. Indirectly, we all have exposure to the PIIGS.

This is all market friendly news and the global Ponzi scheme continues. If one of us fails, we all fail.

The economic releases this week have been light. Retail sales (ex-gasoline), initial jobless claims and the PPI all came in better than expected. Tonight China will release its flash PMI and it should be decent.

As I’ve been stating for weeks, it’s all about the fiscal cliff. Republicans and Democrats are closing the gap on tax hikes. Republicans have agreed to $800 billion in revenue increases and Democrats want $1.4 trillion. They could meet in the middle. Unfortunately, this is only one third of the entire package. Spending cuts and entitlement reform have not even been discussed.

I still believe that Republicans will concede to higher taxes for Americans making more than $250,000. The middle-class will be largely unscathed and this will appeal to a large voter base. Both parties stand to benefit (from a PR standpoint) and President Obama will get his wish (raise taxes on the “rich”). Democrats will want to throw in a debt ceiling deal, but it won’t happen. Republicans will hang on to this bargaining chip.

In a month, we will bump up against the debt ceiling. Actual spending cuts (not phantom Medicare cost savings) and entitlement reform will be demanded by the GOP. This process could get ugly and I believe the market will sell off during the process. Our debt rating could also suffer as it did in 2011.

Most Americans don’t realize how dire the situation is. All of the tax hikes will only fund the government for eight days. We don’t have a revenue problem, we have a spending problem.

Deficits are ballooning and the cliff has nothing to do with a balanced budget. We are nowhere near balanced and that word should be removed from the Congressional Budget Office’s dictionary.

The US spends $1.3 trillion more than it takes in each year and we are simply trying to lower that to $1 trillion per year. We have no intention of balancing our budget and we couldn’t even if we wanted to.

All of our annual tax receipts just cover entitlement (Medicare and Social Security) and interest on our national debt. Every day 10,000 Americans retire and instead of paying into Social Security, they draw from it (double whammy). This problem will grow exponentially in coming years.

The market wants to drift higher and the news today is positive. I like day trading strong stocks with low P/Es that are rallying off of a base and have broken through minor resistance. Asset Managers are rotating into these names and they will move higher even without help from the market because they are attractively valued. I am out of all my positions the same day. The market is not gapping higher and we are not rewarded for overnight risk. I do not want to have the fiscal cliff rug pulled out from under me if the rhetoric turns ugly.

I have been using this strategy successfully for a couple of weeks. It could end abruptly if investors get the fiscal cliff jitters.

I will not get short until the SPY breaks below 100-day moving average. If that happens I will buy a handful puts. I will not add until I see follow-through selling and fear (rising VIX).

Day trade this rally and keep your overnight risk exposure to a minimum.
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