No deal, but markets are optimistic

MARKET BEHAVIOR
Stocks surged at the open on hopes of a resolution to the looming Debt Ceiling.  The market is less than 1% from all-time highs as it largely priced in a deal.

MARKET SENTIMENT
We popped following the collapse of the House GOP’s alternative to the budget/debt crisis, meaning there are not competing solutions to be fought over.  Ideally the House will vote on the Senate compromise and find enough moderates from both sides to pass the bill without support of extremists on either side.

Markets are forward-looking and anyone waiting to buy the compromise is already too late.  Safety and profits are rarely mentioned in the same sentence on Wall Street and to make money we need to buy risk when the odds are in our favor.  Over the last couple months, nervous traders sold at steep discounts, creating profit opportunities for more confident investors.  To be successful at this game, we need to recognize when selling is slowing down and creating entry points for opportunistic traders.  There is no such thing as a risk-free trade, but paradoxically the more nervous we are, the safer the trade, and the safer we feel, the riskier the trade.

TRADING OPPORTUNITIES
Expected Outcome:
The rebound continues in spite of the political bickering.  I expected a little more volatility due to the stream of headlines leaking out of negotiations, but the market is holding up better than expected because most of the nervous are already out of the market, leaving few to sell each bump in the road.

Without a nervous dip ahead of the compromise, we will likely see a pullback following the surge/short-squeeze on a deal.  Buy-the-rumor, sell-the-news is a frequent occurrence when prices rally strongly into an expected event and there are few left to buy the news.

Alternate Outcome:
With only hours before the much hyped Oct 17th deadline, we could see weakness Friday morning if we don’t have a signed deal.  Passing this deadline is mostly psychological in nature because the US Govt won’t start missing payments for a couple more weeks.  While we don’t want to get in the way of a declining market, most likely any weakness ahead of the deal is a buying opportunity since traders will quickly look past this episode before the ink is even dry.

Trading Plan:
The market wants to keep heading higher, but buying a deal here is late in the game and will likely pullback either before or after a compromise is reached.  The right time to buy the dip is when everyone is scared, not when most assume a compromise is imminent and a post-deal surge is widely expected.  More cautious traders that bought the dip can move up their trailing stop or sell into recent strength.  While there is likely more upside, we are in this to make money and we can only do that by selling our winners.  Always have a plan to take profits.

Trade your plan; plan your trade