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A Social Mood Blizzard Hits Washington, DC

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What a government shutdown means for the markets.

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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 Minyanville.com; 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.
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
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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 todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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