A Market View From Happy Hour - Sell The News On A Debt Limit Deal

If history is any indicator, the idea that the broader market will accelerate to new highs on a debt limit deal is not well met. The last time we were here with such a politically manufactured crisis in 2011, the market sold off over 18% once a deal was reached. It took about 7 months to retake those previous highs. What was fortunate about that time was that the market was recovering from the Great Recession and enjoying already historically low interest rates. Russia and China were somewhat nicer to their neighbors, bank failures were behind us, home values were recovering and inflation for that year was 3.16%. Compared to today, things were economically better and improving.

The reaction to the end of this current debt limit crisis should be no different. It is very likely to be a "sell the news" event. Unfortunately, the economic conditions are far more severe than in 2011 and could result in a greater downturn in the broader market. With high interest rates, record household debt, the escalation of conflict between superpowers, and stubbornly high inflation, there's few cases that can be made that justify being bullish. And unless a catastrophic macro event happens, there won't be rate cuts this year.

It takes 9 - 12 months for the effects of these FED rate raises to be felt throughout the economy and we are only just getting into the same time last summer where rates were moving up 75 bps after every FOMC meeting. We're beginning to see margin compression and it won't be long before further cost-cutting is going to result in more layoffs. Since the labor market has been extremely robust amidst these rate raises, it very well may be the card that causes the house to collapse.

Today's economic news will consist mostly of New Home Sales, Building Permits, and PMI for Services and Manufacturing. This data doesn't carry as much weight as the bigger reports coming later this week, starting Wednesday with the FOMC Meeting Minutes, which will be released at 2pm EST, the second estimate for Q1 GPD on Thursday, in addition to Initial Jobless Claims, and finally on Friday, PCE, the inflation data that is taken into heavy consideration by the FED. Reports such as these can create pockets of volatility in the broader market, sometimes leading to changes in trends. It is important to note that this upcoming PCE report will be the last the FED sees before their next FOMC meeting.

In reference to the SPDR S&P 500 Trust ETF SPY chart posted with this article, the long-legged doji candle that we have formed today could indicate a change in sentiment provided that it has appeared at the top of this recent breakout rally. Such a candle up here can lead the way for consolidation or indicate that a corner is turning in the market. Bears will want to see the price fall back into the sideways channel labeled Frequent Sideways Area while bulls will point out a potential bull flag forming over the past 4 trading days. As this current rally has done, the market may need a news catalyst to determine the next leg of movement. And with the RSI rapidly approaching an overbought read, it doesn't appear as though there is much upside left, if any.

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