Debt Ceiling Rally a Fake Out?

George Brooks |

Wall Street Stock MarketBrooksie's Daily Stock Market blog

Friday, July 29, 2011     9:24 am EDT

DJIA:  12,240
S&P 500: 1300.67

Tuesday I said, "Without news, odds favor a test of DJIA 12,000 (S&P 500: 1275) by Thursday." We didn't get there yesterday, but may today.

We are going to get some kind of "deal" out of Washington in coming days concerning the debt ceiling and a deficit reduction plan, the latter probably will be handed over to a newly formed bipartisan "Super Committee."

An announcement of a deal will probably come before the open on Monday or Tuesday resulting in a panicky "gap" open, up some 155 - 195 DJIA points in the first 30 minutes of trading, with some additional upside to follow.

Based on what I see now in the economy and Congress, odds favor the "debt ceiling" rally will be a cruel fake out and be followed by a slide in stock prices into September/October with a bottom around DJIA 10,700 - 10,830 (S&P 500: 1150).

I was more optimistic a month ago, before it became obvious political ideologies in Congress take priority over common sense and the best interests of the American people.

Everyone agrees, the rise in this country's red ink must be halted, but derailing a revenue-producing economic recovery in the process is not only counter productive, it is foolish.

The uncertainty all this obstructionism in Congress creates  is already impacting consumer sentiment.  The government is similar to a corporation, or household, where  black ink or red ink depends on the difference between money coming in and money going out.  Our country cannot afford actions in Congress that threaten to abort our economic recovery and reduce desperately needed revenues. 

I see the prospect for a sharp, but brief trading rally shaping up.

While economic reports for the GDP, Chicago ISM (business conditions), and Consumer Sentiment are due shortly after the market opens, the focus is obviously on Congress.

I see lower prices after a debt ceiling rally, and I am not sure we will even get that.

George Brooks

*google “Starve the Beast” –something you need to know to understand what is happening.

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The writer of Brooksie’s
Daily Stock Market blog, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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