Market Overview

Reason To Be Concerned: 8 Days And Counting

If you turned on any of the Sunday morning talk shows, you already know that the government is going nowhere fast on the financial cliff talks. On Fox,  Speaker John Boehner said there was “no deal on the financial cliff,” while on NBC's “Meet the Press”  Treasury Secretary Timothy Geithner said the government is nearing a deal, but not without a tax increase. 

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With exactly 8 days left until Congress adjourns for the year, Democrats are blaming the Republicans for the log jam. In reality neither side is budging and the rank and file do not appear to be gearing up for a fight. With no compromise and the clock ticking, the markets are going to get very unstable. In the last few weeks the (GSPI) S&P futures have gone from a big down move that included a high level of S&P index  arbitrage sell programs to big index buy programs. With the shift came a big reversal in the overall tone of the markets too. Many traders we talk to on the floor of the CME Group (CME) say they thought there would be a compromise by now. In ordinary times we would too, but these are anything but ordinary times.There is continuous talk that there are both moderate Republicans and Democrats who recognize that a deal has to be made. From the way Timothy Geithner was talking, the fight is over concerning higher taxes on the rich. In the last few days there has been talk that things are so far apart there will be no deal. Even if a deal is reached, many are beginning to think  it won't be until Christmas or January. The funny part of all this is that when it is finally agreed on, all it will do is just put off another fiscal cliff down the road. Regardless of what either side agrees on, the road ahead is going to include some serious reforms that have to be carefully implemented.

When you break it down, it  all comes down to entitlements. The White House is talking raising taxes on the rich but they are not talking about where the rest of the cuts are going to come from. One of the top stories out last Friday was written by Ben White of titled Administration mind meld: fiscal cliff edition – GOP response: Is this a joke? – Exclusive: Why Morgan Stanley went hard on the cliff – Obama hits the road. It's a great read and says it like it is:

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view:
Right now the markets are moving off of one thing and one thing only: the cliff. Because of this the ESZ is being dominated by short term / day trading  run by program trading and the HFTs. The way the markets act is they are betting on a resolution but no one knows when that will be. It's our guess not until year end.

Today's data:

  • It's 7 a.m. and the SPZ is trading 1421.20, up 6.8 handles; crude oil is up 53 cents at 89.44; and the euro is up 61 pips at 1.3061.
  • In Asia 6 out of 11 markets closed lower (Shanghai Comp. -1.03%, Hang Seng  -1.19%).
  • In Europe 11 out of 12 markets are trading higher (CAC +0.80%, DAX +0.44%).
  • Today's headline: “S&P 500 Futures Signal a Higher Open”
  • Economic calendar: Today: ISM manufacturing index, construction spending, Fed's Bullard speaks, auto sales; Earnings from PepBoys. TUESDAY: Earnings from AutoZone, Toll Brothers, Pandora, Mattress Firm. WEDNESDAY: Weekly mortgage apps, ADP employment report, productivity & costs, factory orders, ISM non-mfg index, oil inventories; Earnings from Men's Wearhouse. THURSDAY: BoE announcement, Challenger job-cut report, ECB announcement, jobless claims, quarterly services survey, Apple/Samsung hearing; Earnings from H&R Block, Lululemon, Smithfield Foods, Cooper Cos. FRIDAY: Employment situation, consumer sentiment, consumer credit
  • Globex volume: 1.68mil ESZ and 10.6k SPZ trade
  • Fair value: S&P +5.75, NASDAQ +16.75

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