The equity markets appear to be in a holding pattern as the government sorts out its mess. A quick look at the Commodity Futures Trading Commission’s weekly trading reports shows that commercial traders dumped approximately 35,000 contracts in the S&P prior to the shutdown. The last report was published on September 25th which makes this data a bit stale. Since most of our analysis is based on the weekly COT reports we had to find another avenue for our research to determine expected market direction until the government gets back to work.
The S&P 500 yielded some interesting tidbits when reviewed against the 18 debt ceiling hikes over the last 20 years. Our simple review compared the market’s closing price the day before the debt ceiling was raised against the closing price ten days after the hike. The first point to be made is that all of the talk about raising the debt ceiling so businesses can get back to doing business doesn’t correlate very well with the market’s movement. The S&P 500 is lower ten days after the hike in 55% of the cases by about 6.3% with the largest single event loss of 22.7%. Clearly there’s a disconnection between what the government thinks is good for our country versus what our businesses think is good for our country. Conversely, the eight market rallies generated an average return of 3.1% over the ten day window with a maximum rally of 4.8%
Friday’s debt deal hope sprung a nice rally in the indices, bringing them right back near their highs and their respective resistance levels. However, those hopes appear to be fading as a deal is not yet done. We therefore, classify the current action as a, “buy the rumor, sell the fact” type of marketplace. We expect the market to rally briefly, perhaps violently upon the announcement of a deal. We will attempt to get the rally sold with the expectation of lower prices in the coming ten days. We also ran this data for gold, interest rates and the U.S. Dollar. You can find that research, here.
