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Investors Enjoy the 4th, Prepare for Fireworks in Weeks Following

A long weekend suggests reduced trading volume in the stock market, but this is the first day of Q3 so institutions will be buying stocks they didn’t want to show in their Q2 report and selling

A long weekend suggests reduced trading volume in the stock market, but this is the first day of Q3 so institutions will be buying stocks they didn’t want to show in their Q2 report and selling some they did want to show.

With four days in a row on the upside, and uncertainty about the prospects, however remote, of a U.S. default on certain obligations, this doesn’t look like a day to “buy the market.”

Brooksie’s Daily Stock Market blog: An edge before the market opens.

Friday, July 1, 2011 9:20 am EDT

DJIA: 12,414.34
S&P 500: 1320.64
Nasdaq Comp.: 2773.52
Russell 2000: 827.43

Yesterday’s strength was partly due to window dressing of portfolios for the quarter ending June 30, as well as buying in anticipation of a deal in Congress on a debt reduction strategy to stem the growth of annual deficits going forward and consequently a decision to raise the nation’s debt ceiling before the assumed deadline of August 2.

Also contributing was a lessening in the Greek financial crisis, a better-than-expected Chicago ISM report, and I suspect some positioning for Q2 earnings reports expected this month and next.

What now ?

Strength this week has increased the likelihood the June lows have marked the correction lows from the May 2 peak as the DJIA, S&P 500, Nasdaq Composite, and Russell 2000 have recouped close to 60% of that decline.

What could go wrong ?

Congress could fail to reach an accord on how to reduce deficits going forward, refuse to raise the debt ceiling by August 2, thus sending the U.S. into default.

We only have to run this bizarre “my way-or-the-highway” brinkmanship up to August 1, to spike blood pressures, divisiveness, angst, and the prospects of a slash in the U.S. debt rating, while pummeling stocks, bond prices and the chances of a continued economic recovery, and our credibility for years to come.

Allowing a default is so unthinkable, so un-American, I must conclude it won’t happen. The question is when do we get the announcement that the debt ceiling has been raised ?

Push comes to shove, both parties are responsible for the run up in the national debt, just google, “Who is responsible for the national debt” and you’ll get a wake-up call.

The U.S. House and Senate won’t take a holiday for the 4th, so they can accelerate efforts to avert a default.

The Street may be having second thoughts about a softening economy, which has been adversely impacted by supply by disruptions following Japan’s earthquake/tsunami/nuclear meltdown.

The Chicago Institute for Supply Management (ISM) reported a jump in June to 61.1 from 56.6, comfortably exceeding the highest estimate of 58.5 in a recent Bloomberg survey.

The Chicago ISM is a composite diffusion index of manufacturing and non-manufacturing conditions in the Midwest region. Readings above 50 percent indicate expanding business conditions.

At 10 o’clock the results for the ISM Manufacturing Survey of 300 U.S. manufacturing firms will be reported. Encompassing employment, production, new orders, supplier deliveries, and inventories, it is not expected to confirm Chicago’s rebound.

Preceding it by five minutes, the Consumer Sentiment Index is expected to reflect sluggishness, as well.

We may get an excellent buying opportunity, if enough fear about a default mounts.

Enjoy a SAFE Fourth of July weekend and get prepared for fireworks in the weeks following it.

George Brooks
[email protected]

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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