There's No Reason for Stocks to Rise Any Time Soon

NEW YORK ( TheStreet) -- The initial reaction to President Obama'a re-election was expected.

Prior to the showdown last Tuesday night, the price of gold was bid up sharply during the day session. Clearly, the biggest reason behind gold's turn of fortune -- after trending lower for weeks -- was the notion that the current administration, if re-elected, would continue along the same path of bigger government and bigger spending, leading to a weaker dollar. Get ready for QE4, QE5 -- maybe beyond. Who knows?

Because of the struggling economy, it is extremely likely the Fed will continue to expand its balance sheet in some manner. In theory, this should continue to drive risk assets higher as investors are forced to turn to equities and commodities to generate a meaningful return that can keep up with inflation. I emphasize "in theory."

The reality is, the nasty sell-off we have seen since last week and risk aversion across asset classes are not a direct result of Obama's re-election. It plays a role, sure, but this selling has been a long time in the making.

Many of my colleagues had discussed for weeks the idea of a Romney win being a positive for stocks and commodities and an Obama win being a negative. I would say they are partially correct. The initial knee-jerk reaction to the outcome was clearly negative, and I do believe that had Romney won, we would have seen stocks and commodities rally. That rally would have proven to be temporary, however. Nothing and nobody could have stopped this.

The wheels were set in motion a long time ago. What has been interesting to watch is the degree of selling. One need only look at Wednesday's volume to clearly see there was conviction behind it.

Regardless of who is in the White House, we are all staring down the barrel of a loaded fiscal gun. We are all vulnerable to a Greek default, or a run on European banks. We are all going to have to deal with artificially inflated asset prices that occasionally will have the wind knocked out of them. Our economic fortunes are now directly tied to China -- it's unfortunate, but that's the reality.

It is impossible to say exactly what markets are likely to do in the coming months given the outcome last week. The dollar continues to stay strong. In fact, it has been trending higher. Given the amount of headwinds now facing stocks, and the economy, I think a continued period of selling is in store. We are seeing technical breakdowns in the stock indices, and other risk assets such as crude oil. A trip down to 1,200 on the S&P 500 is a real possibility. We could easily see oil drop another 10 bucks a barrel as demand and sentiment continue to erode. Notice I say "could."

My intention is not to sound like a doom-and-gloom television pundit, but to give a realistic assessment. Let's face it -- the "Bernanke put" has been forgotten. The Fed has thrown a lot of cash at the markets, but it does not have the power to create jobs out of thin air. Only time will tell if the Fed's actions, and the actions of our current administration, are enough to turn this economy around.

And although we see glimpses of improvement here and there, I think everyone would agree that growth has not been up to par, and that, thus far, the Fed's actions have proven to be largely ineffective. Time will tell.

These are issues that would need to be dealt with regardless of who won last Tuesday night. The bottom line is this: I believe we could be in for some serious pain. We are at a place where the markets will fall as a result of lousy economy data, yet still fall if the data show improvement because the thought of the Fed removing the punchbowl is too much for Mr. Market to bear.

Until a lot of the current uncertainty surrounding the fiscal cliff, taxes, the welfare of China's economy and the euro is removed, I feel markets will remain volatile. In addition, we need to see real, consistent improvement in our data set before the Fed can even consider monetary tightening of any kind. We are just not there.

We need to wake up. We are looking at higher taxes, decreased government spending as budget cuts loom and an economy that, after all that has been done, is still in danger of falling back into recession. Want to see what tax increases with budget cuts looks like? Look no further than Greece, or Spain, or Portugal.

I believe that the day of reckoning will have to come at some point. For too long now our economy has been artificially propped up. If things have truly bottomed out, why does the Fed need to continue to pump liquidity into the marketplace? The reason is simple. Because without it, this economy can't stand on its own.

We could be in for a rough ride. But I do see brighter times ahead. I feel that regardless of who won this election, the markets are in trouble and our economy is in trouble. In my opinion, this is a time to be defensive. I would look for lower asset prices with perhaps precious metals being the exception.

Let's face it: Our government needs to get it together. Quit the bickering and get things done. Stop kicking the can down the road. Until we see more bipartisanship cooperation, we are going nowhere ... fast.

Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders.

Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.

Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.

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