The score is 1 – 1. In the first round of the Debt Ceiling Negotiation vs. The Stock Market battle played in July and August, 2011, the market lost badly. From high to low during this period, the market lost roughly 16% of its value and did not recover until the spring of 2012. The second round was played in late December, 2012. This time, the market won decisively as it gapped 2% higher on the open on January 2, 2013 and has advanced by roughly 20% year-to-date. Round three has begun and will be decided by year end.
As usual, Congress and the President are deadlocked in completely uncompromising positions leaving no room for apparent negotiation. The market has seen this maneuver before and is getting smarter about how to trade during this contest. Much like the way Oracle Team USA tweaked its America’s Cup boat as it battled New Zealand through a series of 19 races to better respond and best the competition, the stock market almost always becomes better at discounting future events as it sees them more frequently.
The Delta Market Sentiment Indicator (MSI) is bullish and rising. We have seen institutional options buyers taking on upside exposure in the January expiration SPDR S&P 500 (SPY) options after five days of S&P 500 sell-off. In the two races preceding the winner-take-all final race in the America’s Cup, the New Zealand team knew they had a major problem as Oracle Team USA was showing increasing speed. As we close September, the strengthening of risk-on market internals are giving increasing signs that the Debt Ceiling challenge will be bested by a bullish market. We predict Market 2, Debt Ceiling Negotiation 1 at the end of three rounds.