For the past four trading sessions, volume in the S&P 500 stocks has been declining while the market has been trading higher - not much higher, but higher none the less. SPX closed at $1419, up less than a dollar while RUT increased $4 to close at $826. My guess is that this reflects the markets' presumption that a deal of tax increases and spending cuts will be reached to avoid the so-called fiscal cliff. I'm not so sure. Obama has certainly made it clear he is willing to go over the cliff if Republicans don't agree to "tax the rich". But Obama has also been very clear about deferring any talk of spending cuts into next year. So what has changed? Isn't this the same impasse that has been going on for years and years? Eventually the Republicans cave in and the debt keeps rising. But the market doesn't trade on politics; it trades on economic realities. And that reality doesn't look very promising no matter which of our favorite characters win this public power struggle. The Challenger Job Cuts report told us last week that employers announced plans to cut 57k jobs in November. That tells me that businesses see this economy weakening and don't expect the fiscal cliff debates to help them, so they are not waiting; they are preparing for hard times now.

The current SPX price is very near the high reached this year in April. RUT is still trading about $20 below that April high. Let's assume a deal is reached in Washington. The markets will spike upward, but how long before traders realize that the economy is still in trouble? My point in all of this is to be very conservative in your fiscal positioning. Many talking heads are telling you what stocks to buy to rally after the deal is reached, but beware. It may be short-lived. Whether you are buying blue chip, dividend paying stocks, or selling iron condor spreads, keep your stops tight and lighten up your positions. Whenever in doubt, take the safer course.

My December iron condor position on RUT currently stands at a 14% loss with position delta = -$124 and position theta = +$263. That large theta is whittling down the loss as time passes. Assuming we don't have to close the 850/860 calls (the delta of the 850 calls = 13), this position will close for a 5% loss. Not a cool way to end the year, but that's the trading game. The key is to minimize the loss so I can continue to trade next year.