Stocks opened lower as the gov’t shutdown carried into the second day and hope for a quick resolution evaporated. The market tested and bounced off of the 50dma for a second day, eventually recovering almost all the day’s losses by the close. As fearful as the headlines are, the market is holding this widely followed moving average and staying near the upper end of the summer’s trading range.
The hope of a quick resolution is fading as the more likely outcome is morphing into a two-week shutdown that simultaneously addresses the impending Debt Ceiling debate. The gov’t shutdown is giving us lots to talk about, but the consequences are fairly minimal and is why most market participants are not rushing for the exits. Those that feared these events had plenty of notice and pulled out days or weeks ago, leaving few to sell the news.
The bigger question revolves around the debt ceiling and the prospect of a default. While the Tea Party is willing to drive us off a cliff to prove a point, there are enough moderate republicans that will break ranks before it comes to that. Of course there are no guarantees and that uncertainty leads to near-term volatility.
One of the more interesting phenomenons is watching the illiquid pre/post market moves as compared to the more liquid primary markets. Tuesday and Wednesday mornings pre-markets were down as traders sold/shorted the budget impasses headlines, but as soon as the market opened, few of the big money institutional traders sold. These guys are taking a longer view of events and are less worried about a few week bump in the road. There are major structural issues we need to be wary of, but short-lived partisan bickering is not one of them.
Going into our third day of shutdown, fewer are expecting a quick and painless resolution, but so far the markets are holding up as most owners recognize the short-term nature of this disruption. While we might see more volatility as this drags on, this is not a fatal economic flaw and any weakness is a buying opportunity.
The Dems are calling the GOP’s bluff and it will be interesting to see if Boehner backs down or stubbornly digs in his heels. If Obama and the Dems don’t give him a bone to call a success, pride might push him, and us, over the edge. While we hope cooler heads will prevail, with egos this large it is hard to know exactly what will happen.
The market had every opportunity to plunge, yet here we stand, holding recent support. That speaks well of support at these levels and shows few owners are willing to sell here. While we should expect volatility to persist, it is not out of the realm of possibility to see the market rally in anticipation of a resolution. Of course that could lead to a buy the rumor, sell the news scenario and we might actually want to sell the pop.
If the market holds up on Thursday, being long with a risk adjusted position size is not a bad trade. Bears expecting the market to crack wide open need to reevaluate their analysis because the market just isn’t responding as expected. Often that means the next move will be in the opposite direction.
Plan your trade; trade your plan