Better to do nothing than make a trade
just to do so that we are likely to regret later

As we shared yesterday, after climbing considerably in November and the first half of December the stock market has been rangebound in recent weeks.

We attribute this to the investors enjoying the market’s near year-end move, but also coming to grips with the vector and velocity of that move and the return of uncertainty in the market regarding President-elect Trump’s policies, rancor in the Eurozone and the start of December quarter earnings. Between this week’s edition of the Monday Morning Kickoff and Tematica Investing, we’ve covered those three topics quite a bit and while we won’t regurgitate them in these pages, but if you missed them you can find those missives here and here.

The tight trading range has made option trading and even shorting stocks a tad more challenging of late but given the economic data and recent management commentary as well as a mixed bag of earnings, odds are investors are sizing all of this up vs. a market that is trading at more than 19x expected 2016 earnings. In a nutshell this suggests the market is priced to perfection and should the bulk of earnings reports disappoint or the majority of guidance be less than expected we’re likely to see the Volatility Index gap up and the market get far bumpier than we’ve seen in recent months.

As we say that expectations for the S&P 500 still call for a year-over-year earnings improvement of 12 percent in 2017 — quite robust given the 2.2 percent consensus GDP forecast for the first half of the year and the dollar, which despite its recent pullback is still much higher than where it was this past summer. Then there’s the political drama that is bubbling over in the Eurozone, which is likely to make the dollar even stronger in the coming months. Ahead of that, we’ve already heard comments from Honeywell (HON), Adobe Systems (ADBE) and WD40 (WDFC) over the recent dollar strength and what it could mean if it continued. Should the Fed boost rates as it mentioned in its December policy meeting, odds are the dollar has little downside, and more upside to go.

That, of course, would have been welcome news for the Financial Select Sector SPDR ETF (XLF) $25 April 2017 calls (XLF170421C000250000) calls had we not been stopped out yesterday. That stop out shows how skittish the market is despite solid earnings from JPMorgan Chase (JPM), Bank of America (BAC) Morgan Stanley (MS) and Goldman Sachs (GS).

As such, we’ll keep our inverse ETF positions in play. While it’s tempting to trade just to trade, the smarter move is to strike when the time is right. In our view, that means getting more earnings reports under our belt to better determine our next move. Like the carpenter says, “better to measure twice and cut once lest we waste time and material.”

We could not agree more, which means we’ll continue to pour over potential trades with one eye while the other along with our ears keeps tabs on those forces that are driving the market near term.