How has the Debt Ceiling Affected the Stock Market This Week?

The stock market is very nervous, which of course is being produced by the intense concentration on the risk involved in the impending deadline for an increase in the debt limit.  In many ways, this reminds me of the same pattern that occurred in 1990 as the pre-announced first invasion of the Gulf War was about to start.  Those warnings of impending disaster were rampant, and the primary advice was to stay on the sidelines until some resolution of that battle became apparent.  Yet, before the bombs even started to drop, the stock market soared and those investors "waiting" on the sidelines were left far behind in cash.

So today, it sounds just as ominous, but at the same time, we've witnessed another juncture at which the stock market has returned closer to the oversold territory.  You can see below that the McClellan Oscillator is right back to reaching that area that produces at the very least a strong reflex bounce.

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I also can't miss highlighting the unemployment insurance claims that were reported yesterday.  We've been citing the internal improvement in the economy and also the mistaken opinion on employment.  But yesterday, we got the first weekly dip of "claims" under 400,000 in a while, and we think that this is a start of the new trend.

Back to the market...from the overall view, you can see in the chart below that the percentage of stocks in the S&P 500 and S&P 400 trading above their 50-day moving average (orange line) are not back down to the level of a few weeks ago as that bottom was being forged.  But at the same time, the percentage of stocks trading above their 200-day (blue line) has dropped.  This seems to suggest that "some" stocks are resisting that decline, which is usually an omen of internal improvement - a harbinger of an impending better climate.

Click to view larger image.

As for the sectors, the biggest change in this week's studies is that the Technology Sector has dropped down to a reading of market weight.  This, of course, distresses us, since we don't ever LOVE a stock market's internal action unless Tech is outperforming.  But we hope that the resurgence of the recent large-cap leaders (IBM, Apple & Google) will bleed down to the overall sector.

Furthermore, the stocks in the Industrial Sector have not been acting as well lately.  A few weeks ago, in that rally from the June botttom, we saw the more defensive sectors (Utilities, Consumer Staples & Healthcare) start to under-perform and the economically-sensitive sectors began improving.  But that changed in the latest concern of the last few days, and those defensive sectors by-and-large have picked back up again.

That's it for this tumultuous week.

Don Hays, Nicholas Warf and Justin Wood

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