How to Play This Fiscal-Cliff Mess

 | Dec 28, 2012 | 8:08 AM EST
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The best way to make a good deal is to have the ability to walk away from it. --Brian Koslow

It didn't take long at all. Following a big spike yesterday afternoon, doubts about a last-minute fiscal cliff deal have set in again. In the very early going, the market has already given back more than half of the gain that came after news that the House of Representatives would be back in session on Sunday night. Both sides seem willing to walk away and to let us go over the cliff and that is being reflected in the market.

I can't recall a time when the market has been held hostage for so long by political negotiation. Nothing else has mattered for weeks other than the fiscal cliff issue and today is going to be just as bad as we bounce around again on headlines and rumors.

The political commentary I read overnight didn't leave me too optimistic about the chances of a major deal. The general view is that the meeting with President Obama and the Sunday House session have more to do with "optics" than any real movement in the negotiations. It is possible that there this is some sort of short-term agreement to create more time, but both parties have things to gain by actually pushing us over the fiscal cliff.

I'm not going to join the legions of folks who are trying to guess how this idiotic drama will play out. I don't have any special knowledge or insight. All we really need to know is that the market is going to be hypersensitive to any and all news about the fiscal cliff and we either have to trade on that or not trade at all.

All the other issues that usually come into play at the end of the year have been rendered irrelevant by this political quagmire. Window dressing, portfolio positions, tax planning and last-minute performance chasing are all secondary considerations and having no impact at all compared to the mutterings of Senator Reid or Speaker Boehner.

There are basically just two ways to trade this mess. Either you try to guess what is going to happen in Washington and position yourself for "deal or no deal," or you wait for some clarity and try to jump in quickly when the market starts to move.

My preference is to react to news as it hits, which actually worked out pretty well yesterday if you were very quick. There is going to be substantial risk over the weekend and I suspect many market players aren't even going to bother trying to play this.

I really would like to get back to some stock picking as there are some interesting charts out there but we have no choice but to share this fiscal cliff obsession with everyone else. We'll see what develops. Hopefully, we'll have some volatility to trade. 

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