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A Social Mood Blizzard Hits Washington, DC


What a government shutdown means for the markets.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

We've discussed The Devolution of Social Mood plenty in these parts; everything from The Short-Sale of American Icons to how Quantitative Easing Could Trigger War Games to Why Kim Kardashian Matters to the Markets.

The basic premise is, or has been, that social mood and risk appetites shape financial markets. We often point to how the Great Depression caused the stock market crash of 1929 rather than the other way around, as the history books would have you believe. While many believe this causal consequence is akin to the chicken and the egg, the sequence has profound implications for the markets.

These topics are food for thought given the latest example of societal acrimony on the world stage that is Washington, DC. While the prevailing wisdom is that the government shutdown will prove transitory and a relief rally will follow, we would be wise to note the stark differences between modern-day markets and the last time the government shuttered its doors 17 years ago.

We can debate the "what" (massive government intervention) or the "why" (growth is anemic and the financial fabric remains entangled despite trillions of reasons not to be), but for purposes of this discussion, let's look at the tape at face value. Demand, artificial or otherwise, has outpaced supply since early 2009, and the attendant price action evolved perception to the point where most everyone now believes the Federal Reserve has backstopped risk.

While perception is reality in financial markets, it is also subject to change. In fact, one could argue that the dynamic chasm between perception and reality is where profits reside. Through that lens, The Waning Integrity of US Financial Markets, the "other side" of Fed policy, and the inability of politicians to find middle ground -- with a debt ceiling looming on the horizon -- are very much intertwined.

After 23 years on Wall Street, I would be remiss if I didn't pay homage to the percolating performance anxiety; if the past is a prologue to the future, the buyers will be higher and the sellers will be lower. Given the run we've seen -- not just this year, but for the last five years -- it's understandable that folks are conditioned for higher prices still, as evidenced by the price action this morning.

That will prove to be self-fulfilling if it works, but it also lays the groundwork for widespread denial as and if the landscape shifts. See both sides as we together find our way.

Random Thoughts:
  • Last week we touched on the previous head-fakes to all-time highs this year, in which one pullback measured 8% and the other 5%; this pullback, thus far, is in and around 3%.
  • The question, of course, is whether this is the requisite pullback before another push higher or the beginning of a stampede in the other direction.
  • And then, of course, we'll have a better understanding if Tesla (NASDAQ:TSLA) is a modern-day JDS Uniphase (NASDAQ:JDSU).
  • We flagged S&P (INDEXSP:.INX) 1680 (the 50-day moving average) as a level of lore, which is the level that held the first test this morning. S&P 1660 (the trend line from last November) is waiting in the wings below that.

  • Is it time to buy gold and short S&P on a dollar-neutral pairs basis, per the second chart below?
  • Happy 11th online birthday to; our first article published on October 1, 2002 and what a long strange trip it's been! Thank you for your continued support; without you, there would be no us.

Twitter: @todd_harrison

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