As we roll into the last few weeks of the trading year, I’m struck by the question: Does the data even matter?
Of course, it still matters, but does any single data point really hold the weight that the fiscal cliff talks do?
I don’t think so. I know we have the ISM number due at 10am today and the November employment number due on Friday but even if they are excellent numbers (and I don ‘t think they will be) it’ll be meaningless if the politicians can’t come to an agreement on the Fiscal Cliff.
There are two ways this plays out. One, somehow the politicians pull out a last minute save, come to an agreement before Jan 1, and the market experiences a major relief rally. Two, the politicians fumble the ball, the U.S. economy falls into the teeth of $500 billion plus of tax increases, the market drops 20%+ and the politicians finally come to an agreement and the market experiences a massive rally.
For the record, I don’t think it’ll come to the second scenario but what if it does?
This is why, no matter what trades you put on between now and the end of the year, you want to make sure that you have a stop loss attached to everything because both the downside risk and the upside risk (for those that are shorting) are huge.
One sector that I am very leery of right now is the regional banks. According to one of my most trusted technical tools, this sector hasn’t been this overbought since 2005! Any hiccup in the cliff talks and this sector will get clobbered.
The SPDR Regional Banking ETF (KRE) is one to watch in the space. It’s already seen a 13% drop off over the last few weeks and I certainly wouldn’t short it here. But I’d be inclined to short it if it got up to $30 again. A move to $31 would clear some significant resistance, which is why I’d put my stop loss at $31.
Is the Dollar Doomed?
In my opinion, no “cliff” solution will be reached that is not detrimental to the U.S. dollar. This means that you have to take a look at the gold trade. The best way to play gold directly is via the SPDR Gold Trust (GLD). Each share is the equivalent of owning 1/10th of an ounce of gold.
This is a very volatile ETF so there are two ways you can play it. You can put on a position right here at about $166.05 with a $162 stop. If you get stopped out, you can take another stab at it at the lower end of its trading range at $150-$152 (with a $142 stop). As far as a target, I’ve been on the record calling for $2,000 gold since the yellow metal was in the $700’s.
Long story short, there is still a lot of opportunity out there. The key is to be judicious, smart, and above all patient. Remember to always let the game come to you!