Investors: Remember The Sequester!

It's that time again in Washington... The stakes are high. The clock is ticking down. The politicians are getting anxious. And the level of adjectives being espoused in and around the nation's capital is escalating rapidly.

The President of the United States told CNBC Wednesday afternoon that investors should be genuinely worried this time around. This, of course, prompted a handful of analysts to suggest that Obama might actually prefer to see some angst in the markets in order to pressure Congress to take action.

The Commander-in-Chief also used the term "exasperated," to describe his emotions toward Tea-Party Republicans and said that their "reflexive hostility to civil negotiations," threaten the health of both the government and the overall economy. Then the President threw out the word "irresponsible," just for good measure, of course.

Erskine Bowles says while the government shutdown is painful, a debt default would be "catastrophic."

House Minority Leader Nancy Pelosi also got into the act yesterday as she warned that the combination of a government shutdown and failure to increase the country's debt ceiling - an action that could trigger the country's first-ever default - would be “beyond cataclysmic.” (By the way, what is the next level after cataclysmic?)

The "Fat Cat Bankers" Weigh In

CEO's from major financial institutions met with the President Wednesday and reportedly warned the White House of "adverse consequences" if the government remains closed and/or if Congress fails to raise the debt ceiling. Pretty flowery language indeed coming from a bunch of bankers, don't you think?

Speaking of "fat cat bankers," Goldman Sachs CEO Lloyd Blankfein had perhaps the quote of the day saying, "You can re-litigate these policy issues in a political forum, but they shouldn't use the threat of causing the U.S. to fail on its ... obligations to repay on its debt as a cudgel." For the record, the word cudgel means "a short thick stick used as a weapon." (And yes, a Google-search was necessary to decipher the quote.)

Phrases Of The Day

While the term was not evident in of the popular press stories Wednesday, it appears that "brinkmanship" could actually be the word of the day. According to Wikipedia: "Brinkmanship (also brinksmanship) is the practice of pushing dangerous events to the verge of — or to the brink of — disaster in order to achieve the most advantageous outcome. It occurs in international politics, foreign policy, labor relations, and (in contemporary settings) military strategy involving the threatened use of nuclear weapons." Except for the part relating to nuclear war, the rest of that definition sounds about right.

Treasury Secretary Jack Lew used the adjective "extraordinary" to describe the steps his department was taking to deal with the task of paying the government's bills while staying under the debt ceiling at the same time. And although there is still plenty of time left, Mr. Lew has given fair warning that the government will not be able to pay its bills after October 17.

Algorithms Doing As They're Told

Word that the President was going to meet with Congressional leaders prompted traders and their computers to hope for the best at the end of Wednesday's session. However, once House Speaker John Boehner informed the press after the meeting that the president, "reiterated one more time tonight that he will not negotiate" the algorithms went the other way in a hurry during the after-hours session. As such, the bears argue that Mr. Obama may indeed get what he is looking for in terms of a nasty, emotional sell-off on Wall Street.

Haven't We Seen This Movie Before?

While there is oftentimes no telling what the traders and their computers will do today, tomorrow, or the next day, it is important to remember that we've actually seen this movie before. In short, do you recall all the hullabaloo surrounding "the sequester?"

Think back to all the hysterics that occurred before Thanksgiving last year and then just before New Year's. Each time it looked like a deal was out of reach, stocks tanked. And then every time hope that a solution was achievable, stocks rallied. So it went for weeks and weeks. Until in the end, the professional politicians screwed around so long that they actually missed the deadline. Boom, "the sequester" was triggered. The horror!

Remember, The Hero Doesn't Die!

However, recall that although the deadline for "the sequester" had been blown, nothing really happened. A deal got done. Not at the eleventh hour, not at the twelfth hour, and not even at the thirteenth hour. But eventually the deal did finally get sealed. And do you recall what happened to the stock market at that time? The S&P 500 surged 4.2 percent in two days. Then the market went on to rally a total of 9.2 percent before the bears could string together even three consecutive down days.

The point is this. Even if the politicians bicker, fight, claw and scratch their way past the October 17 deadline, the U.S. government will NOT automatically default on its debt. Thus, when a deal is eventually reached - and it will be reached at some point - stocks will likely rally, and rally furiously.

Thus, the real battle cry that investors should be using right now is "Remember the sequester!"

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Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. Fun and Games in Washington (I.E. the Gov't Shutdown and Debt Ceiling)
      2. The State of Fed Policy
      3. The Outlook for the U.S./Global Economy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Negative
(Chart below is S&P 500 daily over past 1 month) Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months) Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

The State of the Tape

The Early Warning Indicators

The State of the Market Environment

Weekly State of the Market Model Reading: positive

Turning To This Morning...

Pre-Game Indicators

Thought For The Day...

There is a great difference between knowing and understanding: you can know a lot about something and not really understand it -- Charles Kettering

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Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1680
  
• Near-Term Resistance Zone(s): 1700

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Neutral
  
• Price Thrust Indicator: Moderately Positive
  
• Volume Thrust Indicator:Neutral
  
• Breadth Thrust Indicator:Neutral
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Moderately Positive

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

The drama in Washington drags on today as both sides appear to have dug in for the long haul. Overseas markets do not appear to be terribly concerned this morning however, U.S. futures continue to move lower. Traders will also be treated to some important economic data this morning in the form of Initial Jobless Claims and the ISM Non-Manufacturing index.

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Japan: -0.10%
- Hong Kong: +1.00%
- Shanghai: closed
- London: +.032%
- Germany: +0.01%
- France: -0.34%
- Italy: -0.25%
- Spain: -0.57%

Crude Oil Futures: -$0.24 to $103.96

Gold: -$14.70 to $1306.00

Dollar: lower against the yen and euro, higher vs. pound.

10-Year Bond Yield: Currently trading at 2.641%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -6.67
- Dow Jones Industrial Average: -49
- NASDAQ Composite: -9.35

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

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Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.