Thursday, October 17, 2013
The market has it backwards.
For the past couple weeks, stocks have been waffling back and forth on news over the debt ceiling. The market falls whenever we get news that the president and the House of Representatives are too far apart to reach a deal. Stocks rally when we hear rumors that a deal is coming together.
News of an agreement yesterday pushed the S&P 500 20 points higher. The consensus thinking is that once an agreement is signed and the debt ceiling is raised, we'll go on with business as usual... And stocks will move higher.
But that's not how it worked in 2011 – the last time we dealt with the debt ceiling.
Back then, stocks were just as volatile as today – rallying on news of a possible deal, and falling when the deal fell through. And the consensus thinking was pretty much like today – the debt ceiling would be raised and stocks would rally.
But the consensus was wrong. Here's what happened...
The stock market waffled back and forth for most of July 2011, as Congress and President Obama tried to hash out a deal. They signed a deal to raise the debt ceiling by $2.1 trillion on August 1, 2011.
Rather than rallying on the news, stocks sold off. In fact, they collapsed. The S&P 500 lost 12% in just one week.
Something similar could be on tap this time around.
Last week, I pointed out that stocks were oversold, and based on the McClellan Oscillator, the S&P 500 could rally 30 to 40 points. It did more than that. As of yesterday's close, it has rallied 60 points.
Stocks aren't oversold anymore. They're closer to being overbought. Investors have been anticipating a debt ceiling deal to come out of Washington. And they're buying stocks in anticipation of the deal getting signed.
But if things play out like they did in 2011, traders should get ready to sell on the news instead.
Best regards and good trading,
Jeff says crises like the debt ceiling aren't the real threat to stocks. "What we ought to be worried about is if Congress and the president decide on 'more of the same,'" he says. Learn how "more of the same" caused the market to drop in 2011 here.
DailyWealth classic: In 2011, Dan Ferris wrote that one of the biggest reasons the debt ceiling will always be raised is because the government doesn't want you to learn that "we'd all be better off with a lot less of it." Get all the details here: What the Government Will Never Tell You About the Debt Crisis.
Private-equity companies are outperforming the market... Blackstone Group and Kohlberg, Kravis and Roberts hit new 52-week highs.
Oil and gas exploration giant ConocoPhillips touches a new all-time high.
Medical-equipment company Boston Scientific shares reach their highest level in six years.
Halliburton breaks out... the oil-services firm soars to a two-year high.