The Debt Ceiling Thingy Was a Little Anti-Climatic, But the Rest of the Summer Likely to be Filled With Excitement

by Dan August 1, 2011 8:28 am • Commentary

Looks like our elected officials did the unthinkable, and did their jobs.  Many of us on “Wall Street,” even those less fancy ones like me, not represented by the “Mooch” (below), have been sitting around the last few weeks scratching our heads asking, “these are the guys that are going to dictate financial markets regulation and fix the banking system??  WTF? 

I guess this debt ceiling thingy wasn’t nearly as dramatic as the media would have you believe, this deal was always gonna get done on time and most large players knew it, which is why equity markets barely budged other than for a couple days, and yields on 10yr barely moved.  The whole thing felt like the build up of one of those Tyson fights back in the 1990s, (before he was really crazy with face paint that my daughters are envious of, but just a flat out killer) where after weeks of build up it would just be over in a round and half.

This fabricated situation looked like a little gift from the trading Gods…..readers of this site recognize this as we were able to create a couple little trades through the options and ETF markets that were catered just to these sorts of movements around the debt ceiling timeline through SPY weekly put spreads (read here) and the inverse VIX etf the XIV (read here).

As I write at 8:30am, the S&P futures are up about 1% on the news of a supposed debt ceiling deal with expected votes by the House and the Senate today. Many are going to want to fade this rally as it will make sense to suggest that last week’s reading on Q2 GDP and the Q1 revision should be more of a focal point as are the continuing debt issues in Europe.  Keep your eye on the DAX this morning into the European close as the index opened up over 1% this morning and has spent the rest of the session going lower (below).  Any further weakness or a negative close on the day could signal that our markets could be a “sell on the news”.

[caption id="attachment_3659" align="aligncenter" width="300" caption="1 Day DAX chart from Bloomberg LP"][/caption]


As for our markets, many are going to want to fade this gap opening and I can’t argue that it isn’t worth a shot as the pessimism that built in the market last week was not of the mid-June Greek variety, it was in my opinion a very half-ass way of giving Washington a little taste of what could happen if they didn’t get their act together. If you fade this you may want to use some mental stops as to where you might cover…..Technically the SPX went right back to and held it’s 200 day moving average on Friday which in some ways was fairly constructive.  Throughout the sell off in May/June, the index did not materially break that important support level.  A close today above 1316 would be near-term bullish and you may not want to stay short above that…..

[caption id="attachment_3660" align="aligncenter" width="300" caption="1 Yr SPX chart from Bloomberg LP"][/caption]

The Euro is rallying vs the Dollar this AM, which I don’t exactly get, but I want to fade this move and play for resistance at 1.45 and a move back to 1.40 as the sovereign debt issues in Italy and Spain will most definitely take focus over the balance of the summer.

We will continue to look for opportunities in oversold stocks and every so often try to short really extended ones, while always doing our best to define risk, so please check back later for new thoughts/ideas.

The “Mooch”, I cringed then, but LOL every time I see Stewart’s take on this…

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