Trading the 'US Default Issue'...

Mike Turner |

Without reiterating what you have already read and/or heard regarding the impasse between the liberal democrats (especially, the US President, who is now being by-passed by both sides of Congress) and the conservative republicans (especially, the 'Tea-party' wing), here are my views on the situation and how I handicap the outcome...

  • 99% probability: A deal will get done. It will be ugly and it may not get done by the somewhat arbitrary date of August 2nd... but, it will get done.
  • 100% probability: The debt ceiling will be raised.
  • 90% probability: Cuts in spending will be promised, but most so-called 'cuts' will be in the form of reduced spending rates of increase and/or pushed off into the future and not well defined (Translation: Political speak for not willing to take a stand on anything that could hurt a reelection bid). I doubt that any serious cuts will be made until a conservative gets into the White House and the liberal majority in the Senate is replaced with a conservative majority. Neither of these outcomes are a foregone conclusion in the 2012 election, by the way.
  • 70% probability: The rating agencies will not downgrade the US credit worthiness, but will issue 'stern' warnings that they will downgrade the US unless the US gets its fiscal house in order... again... likely to not happen before the 2012 election... if then.
  • 70% probability: Taxes on the evil, money-grubbing, socially-bankrupt rich (aka, everyone making more than $150,000 per year and 'may' included everyone who pays taxes and holds a mortgage on their home) will be raised. This will be acquiesced to by the conservatives as it is merely closing tax-avoiding loopholes and not 'really' raising taxes. The left will claim victory for the poor and disadvantaged (aka, buying votes) by taking more from the rich... another form of income redistribution; an avowed goal of secular progressives.
  • 90% probability: No social security check will be delayed.
  • 100% probability: 100% of all social security, armed forces, government workers payments will be made, albeit some may get delayed a few days.
  • 100% probability: Both the liberals and conservatives will demagogue the other and claim victory in the 'deal' when it is finally reached.
  • 90% probability: The global markets will wobble lower as the deadline approaches.
  • 60% probability: The global markets will NOT crash.
  • 60% probability: Interest rates will rise.

The above are my personal opinions... they are not based on factoids coming out of Washington. I continue to be more than a bit cynical regarding the intelligence and/or knowledge of the majority of our elected representatives on both sides of the aisle. My conservative belief structure 'wants' to believe that the conservatives in Congress are doing the right thing by not caving in to the President and the out-of-control spending of Congress. And I hope that I am not being fooled once again by representatives who are more interested in political gain than saving our country for our children and grandchildren. I am, perhaps, still a bit too naive in that hope.

You should note that my handicapping of the probable outcomes leaves more than a considerable amount of room for risk of catastrophic events unfolding. Since we are about to embark into completely uncharted waters and the possibility of market crash unlike anything we have ever seen before, including the crash of 1929 (see last week's letter for my reasoning on this possibility), then we should be very cautious about putting too much money to work in the market right now.

I have decided to take a wait-and-see position and after the great week we had in the market last week (more on this, below), and with the exception of our gold and silver trades, I plan to move us back into cash and watch all of the unfolding of these events from the sideline. It is important to note that gold and silver completely decoupled from the market last week and moved inversely to the market. Every day that the market was up, gold and silver were down... and vice versa. The odds are high enough that the market will tend to move lower prior to a debt-ceiling deal, that those trades look viable enough to stick with.

I do have, in my managed account portfolios, some SuperCycle trades running for gold and silver. The tops of the SuperCycles hit this week. In those cases, we will exit the gold and silver trades on the days that the SuperCycle tops for each metal, respectively.

Big Win for SuperCycle Trades Last Week...

Last week was our first SuperCycle Trade for our CycleProphet Trades service and it was a big winner. I received several emails from subscribers extoling the success of the timing of and the profit achieved in the SuperCycle trade of the S&P 500. I will have more to say on this in my CycleProphet Trades letter coming out later today.

One of my subscribers wrote the following: "I traded the SPY110820C132, entry @$2.59 and pre-set (50%) profit exit @$3.93. Good trade from SuperCycle."

This week, the SuperCycle analysis is quite a bit different for the S&P 500. Again... more on this in the CycleProphet Trades letter.

In our managed account portfolios, in addition to the S&P 500 trade, we put on some additional SuperCycle trades last week. Here are the results: IWM +10.63%; SPY +11.49%; QQQ +23.00%.

Every SuperCycle trade made a solid profit last week. More time and more trading are needed for this methodology to prove its reliability over long periods of time in a multitude of markets, but last week was definitely getting off on the right foot!

The Bull/Bear Report...

CycleProphet Bull/Bear and Turner Oscillator

The Bull-to-Bear ratio has moved from slightly Bearish to a bit more than slightly Bullish with a 2.5-to-1 ratio in favor of the Bulls. This results in a Bull-to-Bear Rating of [ + 2 ]. The Turner CrossOver Oscillator Composite of Signals (black) line has moved back above zero which is Bullish, albeit moving toward an overbought condition. The Short Sell (red) line is trending lower indicating the market is moving a bit back toward an overbought condition. Staying long is still the play, but if Congress and the President can't come to an agreement, the market 'could' get roiled lower. Discretion is the better part of valor and sitting in cash makes a lot of sense.

Have a great week in the market!

Remember... there is a lot of risk on the table as our debt-ceiling issue is pushing us into uncharted waters. When this occurs, only money that can be place entirely at risk should be used to bet one way or the other on what will happen to the market.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
K:CA Kinross Gold Corporation 4.52 -0.09 -1.95 7,419,361

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