Strategizing for a Shutdown

 | Sep 26, 2013 | 11:54 AM EDT
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You have to wonder how we can have a big move up that can be sustained given how much we hear about what can happen in a government shutdown. How do you get excited ahead of an event that could cut a percent out of gross national product? How do you start buying stocks when numbers are too high for all but the most international of companies?

No wonder every lift is met with a sell-off. No wonder we can't sustain any big move, although positive micro news still manages to pop a stock, even a stock like J.C. Penney (JCP) which, from all the stories I have read, does need to raise money.

But let's think this through. One of the hardest hit areas in the 1995-1996 shutdown was travel. Non-essential services like passport issuances and National Parks were shut down. You saw a dramatic decline in travel, which was the weakness that reverberated through the system. We know that the sequester knocked off sales for the airlines -- almost all referenced the sequester as a point of weakness. One can only imagine how badly this one will hurt the airlines, which have been a terrific leader of the bull market.

Now consider how weak Hertz (HTZ) is today, citing airline traffic. That was a hideous downside surprise -- the worst I have seen. But I wouldn't buy it ahead of a shutdown; I would short it. The rental car business was another leader in this market because of the consolidation in the industry.

Again, international companies based here, technology companies and resource-based companies will hold up better than the domestics. But that just means they sell off less.

I keep thinking about the terrific work our own Mark Sebastian has done about the Volatility Index (VIX) and how things are still too complacent. We just aren't set up with enough fear going into an event that lowers growth.

The sell-into-strength side remains the smart side.

Random Musing: Not an encouraging press conference when it comes to the Attorney General and JPMorgan (JPM), that's for certain.

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