A Short Week On Wall Street Might Be a Good Week to Go Short


Try not to become a man of success, but rather try to become a man of value. –Albert Einstein

Well, that was something of a relief. At least to the Bulls.

With last Friday morning looking a lot like the rest of the week up to that point, it seemed like Wall Street would end up with a five-day losing streak.

Then came the news that a meeting between President Obama and House and Senate leaders ended in something other than pure acrimony, which was, apparently, all it took to convince investors that maybe, just maybe, the fiscal cliff wasn’t going to serve as the springboard for an economic belly flop for the U.S, and back into the waters of a recession.

Never mind that nothing close to any concrete solutions to the looming tax increases and spending cuts automatically scheduled for the end of the year were offered up by the participants. Instead, platitudes such as “making sure that middle-class families are able to get ahead” on the Democratic side and “we’re serious about cutting spending and solving our fiscal dilemma” on the Republican side made the late-morning news.

But the one thing that did catch investors’ attention, and managed to reverse some strong downward momentum in the equities market, was the phrase “constructive meeting.” It seems almost silly that such a relatively benign comment, offered up jointly by both political parties following Friday’s morning meeting, was seen as enough of a stark contrast to the last several years of hardcore gridlock that it was taken as a fate accompli that some sort of compromise would be reached during the course of the current lame-duck session.

But there it was, a bone tossed to the public, though likely more aimed at Wall Street. And that was all it took for investors who had recently illustrated signs of concern following the recent election results to shift gears, stop selling, and start buying.

Or maybe the 9% drop of the Dow Jones Industrial Average (DJIA) over the last month, or the nearly 8% dive in the S&P 500 Index (SPX) over the same period, indicates that the fears of a dive off the fiscal cliff had reached the point of being factored into equity prices.

If that proves to be so, the timing to do some pre-Black Friday stock shopping of some nice value stocks might turn out to be fortuitous.

But if you are counting on Washington to have finally found the religion of common sense over partisan bickering and posturing, it might be a count that finds investors short-changed.

The likelihood of more drama from out of D.C. on both the tax increases and spending cuts should be considered to be something that has a fairly high degree of occurrence.

If nothing else, it should bring to mind the fable of the scorpion that manages to convince a frog to allow him to ride on its back to the shore on the far side of the lake. When the scorpion stings the frog mid-passage, and both are heading down to their demise, the frog can’t help asking, “Why? When you knew it would doom us both?” The scorpion’s reply, “It’s my nature,” might end up serving as a metaphor for the lame-duck Congress that is set to fade away on the last day of the year.

We’ll see.

However, with the promise of a thinly traded market, always a distinct possibility during a holiday-shortened week, there is always the promise that market-moving news will have an amplified impact on the equity market. And, with Ben Bernanke scheduled to speak midweek, intensified fighting in the Middle East, and the usual sovereign debt drama cooking over in Europe, the market could easily be moved.

In such a case, Friday’s indication from Washington that a compromise could be in the offering might not be enough to sustain much of an afterglow, at least not without further elaboration from the country’s political leaders. So volatility will remain high, and investors should remain wary.

But at the very least, a brief moment of optimism was had, and who knows, more could even be on the way. Just the thought of it is something we can be thankful for.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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