The Market and the Debt Debate

The market has been going down for the last five days and VIX has jumped from 18 to 25. VIX is the fear index. 25 is not much fear – real fear has driven the VIX into the 50s and higher in the past. So what are we to make of the market? Do we pull out?

Well, let me start by looking at the SPY chart. Still same signal as back in 2/23/11, which was an Exit on Long. Since tops take a while to form, I would call that an early warning signal. Doesn’t mean a top is necessarily forming. Certainly has been a pause for the markets after the straight run up from last September to February. I put on hedges on my portfolio since then. Yes – the hedges have cost me some profit as the markets have been going sideways, but I can live with that. Better to have the protection and still follow my game plan. I hedge with SPY put options but I recently read about placing hedges with call options on the VIX. Not a bad idea for sure, as the VIX goes up when the market goes down and call options would gain value as the VIX increased. Right now I am partially long with hedges in place and have a small long position on GLD, rest cash.

The smart people we have sent to Washington to represent us can’t seem to agree on anything. I don’t understand why the politicians can’t compromise to do both – raise taxes on the rich, close loopholes, take away the tax breaks for oil companies who make billions every quarter, but also reduce expenses like getting out of wars, cutting off waste and fraud, putting limits on Medicare spending per person, and also reducing the size of some of those Government departments as any business would have to do. As a family we are expected to balance our budget, and so should the Government. But after living fat for so long on credit cards given to us by the Asians and others, it will probably sink us into another recession if we take all the candy and guns (wars) away. What will the big war machine companies do when the demand for weapons and ammunition shrink? So let us do it slowly. As a family, we would be looking at both revenue generation as well as cost cutting. I suspect that is what we need to do. Just cost cutting will not be enough. So why can’t our politicians get that? This is not a Republican or Democrat message – just an independent point of view. And while they sit there trying to compromise, there remains a sense of uneasiness in the markets. And unease means fear. Europe is in a mess with excessive spending also and they too cause fear. But what drives up stocks is revenue and earnings growth in companies, GDP is still positive and the manufacturing index is greater than 50. All in all, we should do better for another several months. Eventually, our excessive spending will eat us or a new QE3 will keep shrinking our dollar’s worth and push the markets up again.  I suspect end of 2012 will mark some big changes and I will need to be cautious from now on as it is impossible to precisely predict macro events.

Back to the charts. I am seeing buy signals on some stocks. I mean a dip on a longward bound stock that I would consider worth buying. I think I will start putting my toe in the water and pick up a few more long positions. I also see where TLT just came in with a long signal. TLT is a bond fund.. As fear increases, bond funds get more popular. Think I’ll wait for a pullback on that one. Stay cautious. SPY signals are still Exit on Long.