"No warning can save people determined to grow suddently rich" - Lord Overstone

  • 15 hours Will Regulatory Rollbacks Make Banks 'Too Big To Fail?'
  • 16 hours Elon Musk’s $2.6 Billion Tesla Challenge
  • 17 hours Tech Giants Could Be First Victims Of U.S. Trade War
  • 18 hours Dow Gains Despite Fed’s Rate Hike
  • 19 hours The Biggest Threat To Chinese Oil Futures
  • 20 hours Spending Bill Could Cause U.S. Debt To Soar To 99% Of GDP
  • 22 hours Precious Metals Slide Ahead Of Fed’s Interest Rate Decision
  • 23 hours China’s Soft Power Grab May Be Bad News For Emerging Economies
  • 2 days The Secretive Wall Street Firm Betting On Bitcoin
  • 2 days ‘Data Is King’: The Oil Industry’s Next Most Valuable Resource
  • 2 days Google Invests $300 Million To Combat Fake News
  • 2 days Zuckerberg Dodges A Bullet As Facebook Loses Billions
  • 2 days Tesla Tumbles As Investors Lose Patience
  • 2 days Are Alt-Coins On The Verge Of A Break Out?
  • 2 days What Should Gold Investors Expect From The New Fed Chair?
  • 2 days Who Will Pay For Trump's $60 Billion China Tariffs?
  • 3 days Vladimir Putin’s Mysterious Fortune
  • 3 days Cryptos Resist Social Media Crackdown
  • 3 days The Death Of Dodd-Frank
  • 3 days Bitcoin Bounces Back Ahead Of G20 Meeting
What Killed Toys ‘R’ Us?

What Killed Toys ‘R’ Us?

In another blow for America’s…

Economic Pressures Weigh On Banks And Borrowers

Economic Pressures Weigh On Banks And Borrowers

Banks and borrowers are under…

The App That Democratized Trading Is Now Worth $5B

The App That Democratized Trading Is Now Worth $5B

Investors and customers have rallied…

Will An Imminent Cliff Deal Push Stocks Higher?

Financial markets moved higher on Monday after reports of progress on the fiscal cliff front. The Wall Street Journal reported significant improvement in the previously deadlocked negotiations:

While the White House objected to major parts of the proposal, senior Democrats described it as a tipping point that moves talks away from deadlock. Instead, it cleared the way for both sides to engage in nitty-gritty haggling over exactly where the new income threshold might be set and what should comprise the spending cuts.

The S&P 500 tacked on 16 points and closed near the high for the day. Investors and traders have been waiting for signs the stalemate in Washington was moving toward a framework for compromise. The Wall Street journal hinted at just that:

One Democratic official close to the talks described the offer as a "breakthrough" that allows negotiations to proceed. A GOP official, cautioning that no deal was done, said he believed that any agreement would look something like what Mr. Boehner had offered.

Bullish Credit Spreads

The market's shift back to "risk-on" Monday was supported by bullish moves in credit spreads; long-term Treasury bonds (TLT) closed near session lows, while "junk bonds" (JNK) closed at the high for the day - both support the bullish case. The move away from conservative Treasuries and toward lower-rated bonds signals decreasing fears of a cliff-induced recession.

TLT versus JNK

Small Caps & VIX Align With Risk-On

On Monday, small caps and the VIX showed an increasing appetite for risk assets and a reduction in cliff-related fears. Small caps (IWM) surged into the close. On the other end of the risk spectrum, the VIX dropped like a rock between 2:00 - 4:00 pm ET. We noted last Friday the performance of stocks relative to bonds was hinting at bullish outcomes. Monday's bullish moves in the credit markets, small caps, and VIX provide additional support for further upside in stocks from a probabilistic perspective.

Small Cap and VIX

Big Picture Has Bullish Slant

The video below contains analysis of numerous markets, including the Dow, NASDAQ, S&P 500, and German DAX. The big picture, even prior to Monday's gains, continues to favor the bullish camp.

After you click play, use the button in the lower-right corner of the video
player to view in full-screen mode. Hit Esc to exit full-screen mode.

Table Set For Cliff Negotiations

Monday's market action reaffirmed the market's obsession with the fiscal cliff. Similar to Wall Street Journal reports on Monday, the Washington Post also hinted at positive and bullish progress in the debt talks:

The speaker's preferred plan is to revise downward the annual inflation adjustment for beneficiaries of federal programs, including Social Security. The White House rejected that formulation, but aides in both parties said Sunday that it has set the table for deeper negotiations between the two sides.

Our approach has been and will continue to be to remain on the long side of the markets as long as the fundamentals and technicals allow. With egos and strong political views intertwined in the process to forge a broad framework to tame the federal debt, the odds of something going wrong must be respected. Therefore, flexibility and contingency plans for bullish and bearish outcomes are a must.


Back to homepage

Leave a comment

Leave a comment

Sign Up For The Safehaven Newsletter