The Repercussions of Political Irresponsibility (SPY, VXX)

Raghu Gullapalli:  If you are not aware of the all consuming political debate about the U.S debt ceiling that has consumed the country, then you’ve more than likely been living in a cave.  Our distinguished representatives have debated the possibility of increasing the national debt and solving future deficit problems ad nauseum. Surprise, surprise we are no closer to a solution with four days to go to the deadline then we were four months ago.  Unfortunately our bloviating leadership does not realize the tremendous real life consequences of this political drama. 

Aside from the embarrassment of the possibility defaulting on our financial obligations as a country for the first time, there is the almost assured downgrade of our national credit rating. This downgrade may well cripple any chance of a recovery in our economy and will have cataclysmic affects in the worldwide equity markets. What does that mean for investors? Any fond memories of 2008?

For traders like me, that would involve shorting the financials, industrials, the dollar index or anything with interest rate exposure and hedging myself by buying gold, oil and going long the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX).   But for the average investor, Financial Armageddon: Part Deux.

Just when the more courageous had sighed in relief at recovering almost everything they had lost in 2008, mother market may just snatch it away again. On a weekly chart the SPDR S&P 500 (NYSE:SPY) has been forming a monsterous head and shoulders pattern. The chart below shows the “head” and “shoulders” and the neckline that is the level of support. If that line is broken the proverbial crap will hit the fan and we may see the SPY fall all the way to $122.28.

 

What can you do to protect your portfolio? If you didn’t practice risk management in 2008 it may be wise to give it a go now.

SmartStops has the short-term and long-term stops for the SPY at $128.81 and $127.40

Written By Raghu Gullapalli A SmartStops.net Contributor 

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