The debt-ceiling issue is set to rear its ugly head again on Wednesday. At around 12 or 1 pm Eastern time, the House of Representatives will vote on extending that ceiling until May. The goal is to calm markets and buy time to come up with a longer-term extension.
The general view is that if this goes off without a hitch — largely expected — it won’t upset the uptrend seen since the start of the year. The DJIADJIA +0.46%, S&P 500 SPX +0.44%and the Nasdaq CompositeCOMP +0.27% are up 4% or more so far. 7 gut checks before the stock market’s opening bell
But strategists warn of risk to those gains if the vote doesn’t go smooth, and stock futures were hugging the flat line Wednesday. “The market is very dependent on government action. Any type of messy behavior or inconclusive action from the government has tremendous potential to derail this rally, which is almost predicated fully on government action,” says Adam Sarhan, founder and chief executive officer of New York-based Sarhan Capital.
“Conversely, if it’s a swift resolution, then it’s one less obstacle for the bulls,” says Sarhan. He adds that the fundamental backdrop for the market remains strong — the primary reason for those recent S&P five-year highs. Read more about those S&P gains
Fawad Razaqzada, technical analyst at GFT, thinks a smooth vote and extension result will be more of a damp squib for markets because of the intense focus on earnings right now. But he’s also warns of a market pullback if it isnt’ “passed without a hitch.”
“In the event that a vote doesn’t go through, I’d expect U.S. markets to start retreating as both the DJIA and S&P 500 are heavily overbought,” adds Ishaq Siddiqi, market strategist at ETX Capital.
Of course, the whole kicking-the-can-down-the-r0ad effort won’t be a long-term fix for markets to relax over. “I’d say it would be a short-term positive but doesn’t address the wider issue of what sort of measure will U.S. lawmakers employ to tame the country’s debt burden,” says Siddiqi. Check out: Let’s suspend the debt ceiling forever!
Analysts at Credit Suisse said Wednesday that they remain puzzled by yet anotherS&P 500 closing high, logged the prior day. “For the last 8 days, the analysts said, the index has done the exact same thing…sell early and then rally to or near the day’s highs.
People like David Thebault, head of quantitative sales trading at Global Equities, said he thinks markets need to make a pause in the bullish trend, noting the volatility level is extremely low versus potential risk. “It’s time to be very selective on long equity positions and hedge these with volatility, soft commodities and silver physical markets.”
Sarhan, though says the market has been moving higher in a constructive fashion for the past several years, which tells him the “bulls are clearly in control.”
“Until I see evidence the market’s uptrend is in jeopardy or in trouble, I have to believe this trend will continue,” he says.
– Barbara Kollmeyer
Follow The Tell blog on @thetellblog
Follow Barbara on @MWBarbaraKollmeyer