As we enter December, 2012, the S&P 500 is higher by about one-tenth of a percent. It has been climbing for the last two weeks of November after bouncing from a pullback earlier in the month and is now in the middle of its trading range for the second-half of the year.
Even with improving employment and housing numbers, and while economic fundamentals have been largely positive, investors now seem worried about the danger of higher tax rates and less government spending after January 1. At this writing, there have been few indications of a deal in Washington so be aware that the markets may be vulnerable to “fiscal cliff” comments from the Capitol.
The question that remains, of course, is “Why?” The main thing we can say is that, while there might be plenty of talk about the fiscal cliff, there is not a lot of hedging going on. Some will say that all of the recent action in the VIX options and futures, as well as in SPY and SPX puts, means that everyone is already hedged; we have never seen that argument work.
It could be that people aren’t as worried about the fiscal cliff as the media would have us believe. Maybe they believe that the government will come through or that the consequences are already priced into the recent market decline. Or maybe they actually are worried but not doing anything about it, as a recent institutional survey suggested. We encountered a similar situation with the debt debacle.
From our perspective this is another case of the market mispricing risk. The market will very likely go up if a compromise is reached, but we don’t see a runaway bull phase in our future. Alternatively, if things go south, they could do so in dramatic fashion.
So volatility may not be “cheap” here, but it could be viewed as such in retrospect if we do go off that cliff. So getting long volatility is a good idea here and the easiest way to do so is to buy puts in equity indexes and ETFs.
Also during this last week of November sentiment is positive overseas, with European and Asian indexes advancing by more than half a percent. Germany’s lower house voted strongly in favor of an aid package for Greece, maintaining the momentum toward resolution of the Mediterranean country’s debt crisis.
We have also been noticing that foreign-exchange trading is slightly bullish. The euro is posting small gains against the US dollar, but the Canadian and Australian dollars are down. The biggest mover is the Japanese yen, which is falling dramatically on continued speculation that the Bank of Japan will ease monetary policy after the approval of a new stimulus package last night.
We have taken further notice this last week of November that commodities have been mixed, with oil little changed and copper higher by almost half a percent. Precious metals are flat and most agricultural foodstuffs are down.
Stocks like financials and technology, especially Apple, always grab lots of attention. But other names have been flying under the radar with some important developments these days.
In some company-specific news, fast-food giant Yum Brands is showing some end-of-November weakness after they issued a warning about slow growth in China. Yum Brands said that it expects fourth-quarter comparable sales to fall by about 4 percent in China. Management blamed weak macro conditions in the country, which accounts for more than half its business. YUM dropped considerably at the end of November.
Telecom supplier Tellabs is up 17 percent after announcing a $1-share special dividend. Most observers would say that this is a lot of money for a stock that closed at $2.95 as recently as November 29th.
Finally, Zynga has been taking a beating during November after Facebook renegotiated its business relationship with the gaming company. The new arrangement will make it harder for ZNGA to channel traffic to its site; the news is sending the shares tumbling at month-end.
As 2012 draws to a close, we hope that you will enjoy a joyous Holiday Season and New Year of Happiness and Good Trading.
Jon “DRJ” Najarian
Jon ‘DRJ’ Najarian is co-founder of optionMONSTER® and
co-lead analyst for the InsideOptions™ trade idea alert
systems. He spent the first 29 years of his trading career
trading in and around the pits of the Chicago exchanges.
“DRJ” is a frequent contributor to CNBC, the Wall Street
Journal, as well as other prominent financial media
organizations. Mr. Najarian also co-developed the
patented trading algorithm the Heat Seeker®, used to
detect unusual trading activity.