Wednesday, October 16, 2013

Optimism Moving Back Into The Equation

Stocks are sharply higher today amid optimism that a vote on the debt ceiling is going to pass in Congress ahead of the midnight deadline tonight.  Just yesterday the market closed at its lows amid pessimism that a bill would be ready.  So there is a bit of investor schizophrenia going on right now.

The latest reports indicate the House will bring up the Senate plan for a vote on the House floor with enough votes to pass.  Whether or not this actually occurs today remains to be seen.  The vote should come in the next hour or so.

Yesterday, ratings company Fitch announced it was placing the US 'AAA' debt rating on negative watch due to "political brinksmanship" over raising the debt ceiling.  So even if a deal gets done today, some damage has already been done and the concerns about our reputation and ability to function ahead of deadlines will not likely be questioned.

Earnings season kicked into full swing last night, and many companies have reported including a handful of large financial companies.  So far, the number of stock rising on earnings is dwarfing the number of stocks falling after reporting.

Stocks rising on earnings:  BAC, INTC, MAT, PEP, YHOO, BLK, GWW, PJC, ABT, NTRS, USB, CMA, KEY, PNC, AAP

Stocks falling on earnings:   STJ, SWK, ASML, LLTC

The dollar is higher today which is likely weighing on gold prices ($1269), but oil and copper prices are higher.

The 10-year yield is getting a small boost to 2.73%. 

And the volatility index has been crushed today.  Yesterday it closed some 16% higher and looked like it might hit 20 again.  But today it is down -17% so far and all the way back to the 15.50 level.  So the market is making a pretty big bet that a deal gets done today.

Trading comment: We are not sure why the market is so convinced the votes will pass today.  There has been so much back and forth it seems far from a done deal.  But maybe the warning from Fitch yesterday as well as the comments from many leaders that it is silly to use the debt ceiling as a weapon will lead to cooler heads and more compromise.  The S&P 500 is not far from making a new high, and the small and midcap indexes are already at new highs.  So there is plenty of optimism in the air.  This also begs the question, if markets are already up this much in advance, will they continue to rally if a deal does get done?


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