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It was yet another week of off-kilter markets and unexplainable reactions to economic data and macro-events. It’s hard to tell if we are in a bad is good or good is good or everything is bad cycle?

The one thing we can be sure of is that while you have just read this sentence, the national debt has increased by some ridiculous sum. For all the numbers that I consider on a daily basis, this is the one that is tough for me to wrap my brain around. How can we casually be talking about $16 trillion?
No matter what your political leanings, Senator Alan Simpson from Wyoming put it in to perspective on CNBC last week when asked by Steve Liesman about the debt.

STEVE LIESMAN: Senator, if you were in a position now to be advising both candidates, what would you have them say now about the deficit, particularly in light there's a vice presidential debate this evening. What would you like to hear from them?

ALAN SIMPSON: Well, I think I'd want to tell them what a trillion bucks is. I know that's a silly exercise. Just say-- well, let me tell you something about us-- this country.

If you spend a-- if you spend a buck a second, you wouldn't hit a trillion for 32,500 years. And if you spend a million a day since the birth of Christ, you wouldn't be at a trillion. And the big bang theory of the universe happened 13 billion 600 million years ago, that ain't even close to a trillion. And we owe 16 of those babies!

So start thinking. And then you're going to borrow $3,600,000,000 a day, every day. You're going to do that today, tomorrow. Every buck you spend, you borrow 41 cents. And I would say, "Will one of you-- let a peep out of yourself of what you're going to do about that and to restore the solvency of Social Security without letting the A.A.R.P. tear your leg off or Grover Norquist on the other side rip the other let.

Really, what’s another couple of trillion dollars among friends?

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.

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Volatility Commentary

Despite S&P500 Index falling 2.2% this past week, market volatility as measured by VIX and VIX futures prices have been very subdued.

This can be clearly seen with VIX November futures. With over 5 weeks to go before expiration, VIX November futures are trading at just 11.2% premium over spot VIX. Normally, this premium would be 15% when VIX futures are in contango.

In fact, this premium was greater than 20% right around the previous two VIX expiration months. This presents an attractive situation to potentially go long volatility using VXX options, should VIX start to break above its current 14-17 range.

Currency Spotlight

The U.S. dollar finished the trading week relatively flat against its major trading partners. The USD/CHF currency pair made multiple attempts this week but failed to close above the 200-day moving average.

As concerns grow on when and how Congress will address the ‘Fiscal Cliff’, this pair could be vulnerable to the downside. On Monday, Retail Sales will kick off the week. If sales disappoint tremendously, we could see USD/CHF plummet within the context of its bearish trend that started on July 24^th.

However, if we receive a positive print and no major earnings disappointments, we will pay close attention to the .9450 level. If price action is able to rally above this level, we could see room for further upside targeting the .9600 level, which is also just below the 50.0% Fibonacci retracement of the last major bearish decline from July to September.

Watch List

Well the market started off with a wild choppy swing, went sideways for most of the day, then finished what it had started and sold off at the close. As we look back on the week the markets have virtually went sideways with any gains or losses offset the following day. Earnings season is showing that it's not nearly as bad as expected early on with JPM reporting record numbers and smashing expectations. Yet they along with the financial sector had a downturn today.

Next week will be a big sign for the financials and it might cause them to either sell off hard into the end of the year or launch them into new recent highs. I personally expect the latter and the general consensus is the opposite, but this is the reason why I feel the banks will do well. Along with this strong bullish surge by the housing sector that has seen a huge push of new home/refinanced loans, I believe that the fiscal cliff will benefit the banks the most. By far they have the most to gain as people scramble for loans and intermediate to long term investments.

I also believe people will start taking profits out of stocks going into the last 2 month of this year. So if we see a surge in price on stocks like Goldman Sachs and Citibank, look for overbought stocks such as Home Depot, Expedia, and even Apple to start selling off hard as people are looking to take profits and run! Open Position: DVN Stocks to Watch: NFLX GMCR FSLR ANR UNG GS JPM

Futures Data

Value Areas:

ES 1437.00 / 1429.50

POC... 1422.50

YM 13297 / 13241

NQ 2722.00 / 2711.00

Notes from the Pit

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Scott Bauer - Bunting (Yes, like in baseball)

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