Weekend Breakthrough? A Risky Bet on Debt Ceiling Resolution

George Brooks |

US CongressI expect a breakthrough in the debt ceiling stalemate and, possibly over the weekend.

This is one of those cases where Wall Street is assuming default can’t reasonably happen. If it did the stock and bond markets would trade much lower now.

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

Friday, July 15, 2011 9:24 am EDT

DJIA: 12,437.12
S&P 500: 1308.87
Nasdaq Comp.: 2762.67
Russell 2000: 823.32

While the Street, business community, Americans who are paying attention to what is going on, and heads of foreign countries will be relieved when a deal is announced, I don’t see a monstrous rally in stocks. This is what is expected, that’s why the market has been fairly stable.

However, if Congress opts for default, the market will sell off precipitously.

It may still do that, if Congress take a decision to the edge and the Street begins to doubt a deal will be reached. So far that’s not the case.

Actually, the behavior of the stock market has been remarkable in light of all that has transpired.
Assuming the debt ceiling is raised, a few more hurdles loom, namely: the economy – is it slumping or is it just consolidating prior to a renewed expansion ?

European sovereign debt issues, will they worsen ?

Q2 earnings reports, will they beat or lag expectations ?

A recent Bloomberg survey suggests S&P 500 Q2 earnings will increase 13% vs a gain of 18% in Q1.

These earnings are coming out as I write. So far, the Street appears to be wary, but that may have more to do with the debt ceiling issue than with earnings.

The BIG money is in the drivers’ seat, the public and smaller institutional investor just can’t decide which way to turn.

What is key now is, what does it see for corporate earnings a year from now ?

Will the BIG money use current market weakness to buy, or sensing disappointing Q2 earnings reports, step away and allow the market to plunge in response enabling it to buy-in at bargain prices as most investors are bailing out.

Today: Yesterday started off strong but gave most of its gain back by the close. This kind of action is technically a negative, but let’s cut some slack for the uncertainty surrounding the concern for a debt ceiling list.

Again, we have the prospect of a firm open. Some traders will bet that a decision on the debt ceiling will be reached over the weekend and buy now with plans to sell into a rally next week. If the market were more depressed in face of fears of default, that would be an attractive tactic.

I don’t think enough people are worried enough yet, for this to be one of those scrumptious buying opportunities. I prefer the “I can’t stand it anymore, I’m outta here” environment where no one wants stocks to be buying.

Recent Headlines :
“Is the Fix In” ? (June 16 – DJIA: 11,897)
“Quadruple Witching Friday –Buying Open Risky” (June 17 DJIA 11,961)
“Ugly ! Nevertheless, the Outlook Can Change Quickly” (June 20 – DJIA 12,004)
“No Time For Napping” – (June 21 DJIA: 12,080)
“No Hope in Sight ? Don’t Bet on IT ! Prepare for Opportunity” - (June 22, DJIA: 12,190)
“Countdown to Opportunity – Start Preparing !” - (June 23 DJIA 12,109)
“ BIG Money Nibbling – Stocks Beginning to Look Attractive – Negatives can Vanish” (June 24 DJIA:
12.050)
“Institutions Showing Interest – Not Reaching Yet” (June 27 DJIA: 11,934)
“Will Q2 Earnings Reports and Congressional Action on Debt Ceiling” (June 28 DJIA 12,043)
“ Don’t Buy News on Greek Vote – Spike to Be Short-Lived” (June 29 DJIA: 12,188)
“Again: Debt Ceiling Approval and Q2 Earnings Catalysts” (June 30 DJIA: 12,261)
“Enjoy the Fourth ! Prepare for Fireworks in Weeks Following” (July 1 DJIA: 12,414)
“Did Someone Blink ?” (July 5 DJIA 12,582)
“A Pause is Needed Here to Digest Recent Gains, Q2 Earnings Ready to Take Center Stage” (July 6
DJIA 12,569
“Whoa !” (July 8, DJIA: 12,719.49)
“July Could Be a Pivotal Month” (July 11, 2011, DJIA: 12,657
“Watch This One Closely – Very Closely” (July 12, 2011 – DJIA: 12,505)
“Default is Un-American” ( July 14, 2011 – DJIA: 12,491.11 )

George Brooks
sensiblesleuth@gmail.com
…………………………………………………………………………………………………………
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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