Without a doubt the market loves a good crisis. Whether it is the shutdown of the federal government, the looming debt ceiling deadline, or the ever-present debate over when the Federal Reserve will taper their asset purchase program. The media loves to latch on to the next potential catastrophic event and endlessly analyze the implications of a potential misstep by politicians. The pattern this year, like so many others, has been that the market fades in the weeks leading up to the deadline and then blasts off once a resolution has been reached. That same cycle holds true even if the solution is temporary and will likely end in a similar dispute just weeks or months later.
Yesterday’s rumor of a temporary resolution to the debt ceiling deadline is just another example of politicians kicking the can down the road. Want to know why they keep doing that? Because it works.
The SPDR S&P 500 ETF (SPY) gained more than 2% yesterday on the back of this tepid resolution. You would be hard pressed to find an underlying stock in SPY that was not positive today, with 96% finishing in the green. The gains are largely the result of calming fears over a potential default in the payment of U.S. debt. However, it certainly does not significantly change the fundamental or technical outlook for stocks in the near-term. The markets seem more and more focused on sensational headlines rather than more traditional earnings and economic data. This is the new normal that investors are forced to contend with.
This dangerous game of cat and mouse is one of the reasons that I am concerned about the high risk of a political misstep in the future. There are still many more rounds left to be played, and each narrowly avoided “crisis” will continue to diminish the importance of sound fiscal stewardship in Washington. It is also why I am such a big advocate of having a risk management plan in place as a safeguard against a black swan event that derails the markets momentum.
So far this year, any dip below the 50-day moving average (blue line) in SPY has been an excellent time to pick up stock exposure and I am continuing to advocate adding to positions on weakness. However, having a trailing stop loss in place only makes sense given the height of the market combined with the increasing volatility and reliance on political deal making.
Moving forward I am cautiously optimistic about the balance of the year. As a trend follower, I am always watching the tape and letting the price be my ultimate guide. However, the adage of “buy the rumor, and sell the news” is lingering in the back of my mind as we make our way through this choppy month. My advice is to keep an open mind and a balanced portfolio that is ready to shift in response to any new data that will derail this fresh momentum. A fade from these highs and a break below the long-term trend line may suggest that we are in for more corrective price action.