Politicians kicked the can down the road in January, but it may just amount to prolonging the pain. That’s right, another deadline is approaching with an uncertain outcome.
Click to EnlargeThe sequester was designed as a sledgehammer to force Congressional leaders to negotiate deficit reductions. This looks less likely now, as without bi-partisan agreement, a sizable cut in defense spending is likely. This is one reason that I have recommended a short position in Alliant Techsystems (NYSE:ATK), a Pentagon contractor focused on ammunition. ATK is almost fully dependent on Pentagon spending, unlike other defense contractors like Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) which have private industry business as well.
With fiscal policy tightening up on government spending, the burden of expansion has fallen to the Federal Reserve. It has reiterated its commitment to near-zero interest rates, which is fine as far as that goes. But no one really knows how this will affect business and consumer spending patterns as it is the first time this has been tried to such an extraordinary extent in at least 300 years.
But I like to trade on information I do know. I know the sequestration deadline is coming up…and whether or not a budget agreement is reached, it seems incredibly likely that stocks tied to government spending are going to react.
Recommendation: Short ATK at for a $60 target. Set a stop at levels you feel comfortable with.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
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