Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.
Well the joint was jumpin,' going 'round and 'round
Hey now realin' and a rockin,' what a crazy sound
I remember the end of April as if it were yesterday; I was readying for a month-end hip replacement and the stock market was at an inflection point.
As bulls fingered the cup-and-handle pattern that pointed higher, and bears kept close tabs on a potential double top, the market showed us the way and rallied 5% before retesting that level and subsequently working higher still.
Fast-forward six months; equities, a shade from all-time highs, are again the judge and jury in the "What Matters Now" sweepstakes.
Following the "no taper" knee-jerk rally
a few weeks ago, stocks have been ground lower as the tape weighed the implications of the government shutdown. The primary concern is the potential default of US credit, and while most everyone views that likelihood to be nonexistent, the "tail" is being priced into the marketplace.
While I, too, believe the US will sidestep the worst-case —it's not 100% when the human condition is involved—two elements remain unknown. The first is what will happen if politicians continue to drag their feet and use the debt ceiling as a weapon—the longer this lasts, the more real it becomes—and the second is how unintended consequences take root, be it a credit downgrade or actions taken by foreign holders of our debt.
Bringing this discussion full circle, the S&P
(INDEXSP:.INX) 200-day moving average currently resides near S&P 1600
—the very same level from which we broke out in May. While history doesn't always repeat, it sometimes rhymes, and should S&P 1680
(the 50-day) and S&P 1660 (the 11-month-old trend line) give way, the 200-day would beckon loudly as the next level of lore.
Yesterday was the sixth consecutive test of the S&P 50-day moving average. With each probe, an incremental layer of demand was chewed through.
Consistent with earlier discussions, traders continue to "front" the resolution rally. The prevailing logic is that consequences of a credit event would be so catastrophic that politicians will avert it by hook or by crook.
Back in 2007, we eyed the Battle Royale, with the credit crunch in one corner and global central banks in the other. Now we're witnessing a more traditional confrontation between political factions with the fate of capitalism hanging in the balance. We may have seen this standoff before, but the stakes are higher this time around.
Should politicians drag this out for maximum splash, markets could get spooked, hence this process of price discovery. Should they sing Kumbaya and put their differences aside, the tape will gap higher and punish the naysayers anew. All the while, earnings season is set to begin today with Alcoa (NYSE:AA) and with select banks, including JPMorgan (NYSE:JPM) and Wells Fargo (NYC:WFC) reporting Friday.
If we were to rank our four primary metrics, they would likely be 1) psychology (the perception surrounding the risk of the standoff and to a lesser degree, the reaction to the FOMC minutes tomorrow), 2) structural (rates and/or the ability to service debt), 3) fundamentals (as earnings are released), and 4) technical levels (see our levels from this morning).
Gold $1275 is the right shoulder of dandruff that "would" work to the summer lows, if and when.
Equities are more colorful but rates are the ultimate tell right now. As Thornton Melon famously said, and the same applies for stocks and bonds, "I never get physical, I just get upset. And when I get upset ...he gets physical."
Position in SPY.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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