March madness begins today as we round out a week filled with drama; investors will face the final trading day to witness a budget agreement in the White House. The market seems like it is gearing up for a pullback as the mood becomes downtrodden on the looming sequester deadline. Many have outlined some of the potential pitfalls of going into this sequester without an approved budget such as a major hit to GDP, and cuts to hours and benefits for government employees and cuts to government programs as well. CNNMoney staff states "assuming no last minute deal, $85 billion in automatic spending cuts are due to begin Friday although it may be weeks or months before the pain is felt. Still, markets are likely to remain in cautious mood as major indices hover just below record highs."
The Dow (DJI) sold off nearly 50 points in the last 15 minutes of Thursday's trading and currently the Dow futures are down over 30 points in pre-market trading. The sentiment has been that the stock market has been hot despite a cooling economy, and some are concerned that the sell-off yesterday could be the beginning of a correction that many bears have been calling for some time now. If a correction is to occur, bears would hope that the market would slump a typical 10%, bringing the Dow down to just under $12,700 and the S&P to around $1,360.
I still view this sequester deadline to be a political distraction to the long term uptrend in the S&P (SPX) and associated SPDR ETF (SPY) since the last recession; there are increasing risks to this trend like the European recession for instance, however it is still intact. The trend has been tested and has been resilient through the election as well as the fiscal cliff and not to mention all of last summer's European woes. I expect a pullback today and possibly again on Monday, but I won't be caught shorting this market. Until the actual all time highs are tested, or new bearish info becomes apparent, I am long equities going into the sequester deadline and through to all-time highs and think a long position the iPath Volatility Index ETN (VXX) near $1,565 is appropriate as attempts are made to interpret the market at that time.
The fact is that the sequester deadline is simply distracting investors, the hype has already been sold and baked into the S&P, any price decline solely based on the sequester from here on will be solid buying opportunities. Tuesday, Ben Bernanke defended stimulus as well as his inflation record in front of the Congress and the markets responded with confidence. This confidence in the underlying market is still there and many are looking to double down on a dip; do not get caught fighting the Fed, or the trend.
March Madness: The spending cuts loom in the overall economy with the sequester deadline today, yet the Fed will continue to trickle into the market and prop the bull trend well into the future. However, the volatility surrounding a trip to all-time highs is clear as we approach all-time highs.