Brooksie’s Daily Stock Market blog: An edge before the market opens.
Tuesday, June 21, 2011 9:16 am EDT
S&P 500: 1278.36
Nasdaq Comp.: 2629.66
Russell 2000: 788.46
Yesterday, I said that without some lightening in the uncertainties and negatives depressing stocks, it looks like the market is going to keep probing for a comfort level. Also, I noted that the DJIA and S&P 500 would encounter resistance starting at 12,060 and 1278 respectively.
That is where the market closed, somewhat upbeat, but on very light volume.
Today: Favorable news out of Greece can bump stock prices to the next resistance level (DJIA: 12,215, S&P 500: 1302), but buying on the news is risky.
I don’t want to down play the seriousness of a Greek default. European banks would get crushed with U.S. banks running a close second. The potential damage of a Greek default is so huge, an accord must be reached.
Where could a boost in the U.S. markets come from ?
Evidence that the U.S. and foreign economies are not going to tank is needed.
We get Existing Home Sales at 10 o’clock today, Jobless Claims at 8:30 a.m. and New Home Sales at 10: a.m. and Durable Goods and GDP Friday at 8:30 Friday. It is doubtful any of these can help the market, in fact, they could hurt the market if they are bad enough.
I think the swing factor is an agreement in Congress for meaningful plan for debt reduction going forward, which would clear the way for raising the nation’s debt ceiling and averting a default by the U.S.on certain obligations.
Investors’ fears of a potential default by the U.S. government if the debt ceiling isn’t raised by the “assumed” deadline of August 2, will escalate in coming weeks.
Depending on how the press hypes its catastrophic consequences, the stock and bond market could get creamed.
If an agreement is not reached and the ceiling isn’t raised, the market and bond market stand to continue to get hammered beyond August 2.
Negatives becomes Positives:
But, if Congress reaches an accord with both sides compromising, the stock market benefits from both the debt ceiling being raised,as well as from the assurance to U.S. and foreign investors that a huge problem here has been confronted and addressed with solutions.
Assuming no new negatives, or a seriously worsening economy, such an event would trigger a big rally.
While hysteria about default mounts, it will be difficult for investors to think positive. However, those are conditions that produce opportunity.
Common sense says the debt ceiling will be raised; it’s been done 75 times since 1962 and is done to accommodate obligations already approved, not new ones.
For this reason, the BIG money may not wait for an announcement and buy ahead of time.
How far this rally can carry depends, of course, on the outlook for the economy at the time, but an accord on debt reduction would remove a huge overhang of supply from the market and open the floodgates for money managers currently sitting on the sidelines with client cash earmarked for common stocks.
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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