Who Is Steering This Ship?
Uncertainty abounds once again. The 11-letter word has become the new four-letter word for the markets. With every economic report, "breaking news" flash, Federal Reserve Governor remark and 22-hour speech from the Senate floor the markets seem to dance around like Richard Simmons circa the 1997 classic "Sweatin' to the Oldies".
Since the Fed announcement on Sept. 18, we have seen the S&P 500 December Futures contract retrace its steps for five consecutive trading days since hitting that 1727 level, now trading at 1690. The metals and currency futures have been even more erratic, with the December Gold Futures contract falling over 4% in four days, breaking below the 1310 level on Tuesday, only to trade higher by over 1% today at 1336. The EUR/USD December contract traded lower for four consecutive trading days, hitting a low of 1.3467, and then popping to the upside today touching a high of 1.3537
The truth of the matter is, we should be accustomed to this so-called "dancing", as we have lived under a cloud of uncertainty since August 2007. If anything, the moves that we have experienced since last Wednesday pale in comparison to moves that we have seen in other times of uncertainty. Remember when the S&P 500 traded as high as 1344 in late July 2011, only to hit 1122 two weeks later? That's a drop of 16.5%. Do you remember what event was the catalyst behind that drop? Oh yeah...a debt ceiling debate.
Keeping in mind that history often repeats itself, I consider the moves that the market has had over the past five days as the calm before the storm. We are simply in a little bit of choppy water right now. Whether or not this storm hits us head on depends on Congress' ability to steer the ship, and I don't know about you but my faith in them acting in time is running thin. With that said, I am strapping on my life jacket and looking to protect my portfolio with options. As I often say, "failing to plan is planning to fail". Do not let the market catch you by surprise.
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