About an hour before the stock market opens on Tuesday (with Monday having been a holiday), the market looks set for a modestly sharp fall, with Dow Jones Industrial Average futures down about 82 points and S&P 500 futures down about 16, or about 1.2%, following yesterday’s fall of a similar magnitude in Europe.

Exporting just over 1 million barrels per day, Libya is North Africa’s largest producer and exporter of oil, explaining why April oil futures are up a stunning $6.45, or 7%, per barrel, trading just over $96.  And although the deferred months are not up as much in price, they’re still up substantially, with June up $4.70, trading over $98.50.  The fact that the back months are higher than the front month says that the market remains very worried about supplies on an ongoing basis, perhaps for reasons well beyond mideast turmoil, with futures for December trading $101 this morning.

Gold is up about $12.50, or almost 1%, with silver up $1, just over 3%.  Copper is quite weak, as well as are the grains, and treasury note prices are up with their yields down.  In other words, today’s move is all about instability with a hint at economic slowdown if oil prices remain high and the world remains on the brink of…who knows what.

Lately, the US Dollar has been bid up on worldwide instability, but it’s not happening today.  The dollar is up very slightly – well within the range of any ordinary day’s move – against the Euro, the Yen, and the Canadian Dollar.  Only the Australian Dollar is particularly weak and that’s likely due to a report over the weekend showing weakening business conditions in that nation.

Adding to the sense of uncertainty was the passage, beginning earlier this morning, of two Iranian war ships through the Suez Canal for the first time in more than thirty years.  The move is part of a two-part strategy by Iran to (1) bolster the regime at home through the time-honored strategy of causing a restless nation to focus on an external enemy, and (2) bolster Iran’s reputation and specifically its government’s reputation among other Arab nations by appearing strong at a time when so many other regimes appear vulnerable.  This has to have Saudi Arabia scared to death, as well as the rulers of Bahrain who are a Sunni family dominating a majority Shi’ite population.  Israel has some hard thinking to do, especially with their inability to rely on the US as the Obama administration’s recent disgusting behavior at the UN proves.

The stock market has had an incredible run for the last several months and readers of my web site know that I got “bullish” (expecting the market to go up) before almost anybody else did for this move.  At this point, I think the Libya instability is providing an excuse for profit-taking which is overdue anyway.  There is a lot of upward momentum, separate from today, but my plan for now is to sell calls, betting that any upside from here over the short term is limited.  (I am not recommending a particular trading strategy to you as most of my trading involves taking theoretically “unlimited” risk for limited gains, selling “naked” options.  It’s a style which is best suited for someone who is a full-time trader, not someone who has another “real” job.)

I also believe that a lot of good news regarding US government spending and deficit control has been built in to the market – more than should be.  In my view, a government shutdown remains somewhat likely, perhaps 35% probability.  While I think that would be a good thing for the nation, I don’t think it would be a good thing for the market in the short term.  In general, while people have been watching the excellent if not perfect work being done by the Republican-controlled House of Representatives, it’s been easy to forget that the senate is still controlled by Democrats and that Barack “at a certain point you’ve made enough money” Obama is still our president.  Therefore, budgetary improvements will be more difficult and less impressive than people think despite the best intentions of spending hawks in the House.

As important as budget cuts will be how much ability Republicans end up having on gutting the ability of the EPA to implement carbon restrictions through regulation and stopping the implementation of Obamacare.  Democrats, and especially Obama, know that the more can get done now, the harder it will be to repeal later, rather like a cancer spreading through a body.  They’re relatively easy to take out when in one place, but once they metastisize, they’re often difficult or impossible to extract surgically, requiring instead a long and painful treatment of chemotherapy and/or radiation and often ended up in the patient’s death anyway.  That, my friends, is a fair analogy of Obamacare and our economy, and that issue is the ball on which voters and traders must keep their eyes in coming weeks and months.

If House Republicans are consistently thwarted by Senate Democrats and the president, expect more market days like today (except with oil going down instead of up).  The only silver lining to that dark cloud is that it will all but ensure a Republican takeover of the senate and the presidency in 2012.