Gov’t Shutdown, a Bullish Catalyst

By Jani Ziedins | Intraday Analysis

Oct 01
S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks marched higher in the face of the gov’t shutdown, respecting support at the 50dma.  Standing strong in the face of such obviously bearish news means the market is not standing on a trapdoor and is positioned well to continue the uptrend.

MARKET SENTIMENT
Who would have thought a gov’t shutdown was a bullish catalyst, yet here we are, up nearly 20-points from yesterday’s weak open.  That’s what we get for thinking.  The fundamentalist and casual observer are flabbergasted by this “irrational” market.  A gov’t shutdown is so obviously bad that the market should tank on the news.  How can the market be so naive to rally on the news.  It makes no sense………or does it?

The key is how obvious the sell off should be.  What means is most saw it coming and were able to sell ahead of time.  This proactive selling virtually eliminating all the selling pressure following the event because all the potential sellers are already out.  Markets don’t move on fundamentals, only supply and demand.  When there is no one left to sell the news, supply tightens up and markets rally.  This market is behaving perfectly rational when we analyze it from the right point of view.

TRADING OPPORTUNITIES
Expected Outcome:
The big takeaway from today’s move is all the sellers are out, meaning most of the downside has been realized.  Any bear looking to capitalize on this headline is a day late and a dollar short.  Obviously a protracted, multi-week shutdown is a different animal, but so far most owners are comfortable holding through moderate volatility and political drama.

Alternate Outcome:
While a shutdown was already priced in, the market likely expects a prompt resolution.  A continued shutdown through the week will pressure the market as a worse than expected scenario comes into play.  Market stability actually takes some pressure off the GOP and gives them a little more flexibility to dig in and play hardball.  But ultimately this issue will be resolved and is not a structural problem in the financial system.  At worst this is a speed bump that will be in our rearview mirror in a couple of weeks.

Trading Plan
Stick with what is working.  The market is respecting support and every dip this year has been buyable.  While shorting opportunities exist, counter-trend profits need to be taken early and often.  Buying this bounce is risky and we will likely see more volatility as this story unfolds, but as traders we only make money when we take risks.  Recent lows under 1675 are a decent place to keep a stop for anyone adventurous enough to dip a toe in.  Realistically we will see more sideways volatility and could dip under recent lows before this is done, so any buyers should use smaller positions and give themselves room to avoid being shaken out unnecessarily.

Plan your trade; trade your plan

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.