Worried About the Sequester?

Posted on February 20th, 2013

Are you worried about the Sequester? Well the Market Isn’t. With most of the worries from the fiscal cliff behind the market, the delayed sequestered cuts pose the next hurdle for investors to jump. But just what does the mandatory spending sequester impact. Here’s a great article that's worth the read and outlines in visual form what’s currently on the table. Understanding the sequester — in 4 great infographics
 
The worry that investors have had with these cuts is that it seems to focus more on discretionary spending vs the entitlement programs that have been positioned as the real debt culprit.  That means businesses are the ones at risk of losing out on the benefits of government spending; hence impacting earnings. This was at least the story back in December.
 
Fast forward to the end of February and it seems that the market couldn’t care less about the upcoming possible reduction of business revenue. As the market pushes to new highs and volatility continues to stay low, the market climbs the wall of worry that is so symptomatic of a bull year.
 
The worry that many of you have expressed to us is that when this thing reverses, it will do so with a vengeance and sell off by more than 5% in a very short period of time and could even lead to a triggering of profit taking all the way down to the post election lows in November.
 
While we don’t try to call market direction, this is very unlikely to happen in the next week when the sequester of March rolls around.  That opinion is simply based on the fact that there is no volatility in this market. Large movements, mathematically speaking, have a very low probability of occurring right now and there seems to be a lack of pent up bear sentiment.  Every day that the market shows any sign of weakness, it is met with more buying.  The fact that puts are so cheap right now also reinforces that the speculators just aren’t making leveraged bets on the downside.
 
Believe it or not, even hedgers and the more conservative investors have found that buying protection in the options market is more effective than selling stock and missing further gains.  So this also props the market to stay higher as the fear trade of selling early just isn’t happening.
 
Those that believe a low in volatility signals a turn in the market are only right as long as they can pick the low in volatility. Picking a low in the VIX is just as hard as picking a high in the indexes.  At some point it will be right, but as it looks right now, there’s no indication of that turn coming.
 
 



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