Here's The Key: The Deadline Isn't Really The Deadline

Although the action on Capitol Hill appears has certainly been frenzied, the stock market continues to yawn. Yes, it is true that the intraday volatility did pick up in earnest on Tuesday as the algos pushed and pulled the major indices in a rather violent fashion after each and every headline, comment, and/or rumor out of Washington. But with the S&P 500 still just a stone's throw from its recent all-time high, traders don't appear to be worried.

The chart below shows the closing prices of the S&P 500 on a weekly basis since the first quarter of 2009. The first thing to notice is the most recent price resides in the upper right hand corner of the graph, which, in and of itself is a good thing.

The second takeaway from this chart is the fact that the current reaction in the S&P 500 is nothing compared to the last two times Congress acted like infants in front of the entire world. Note that the 2011 edition of the budget battle created a very negative reaction in stocks. In fact, the S&P 500 fell nearly 20 percent during the ordeal. However, to be fair, the crisis in Europe also lent a hand in terms of the overall bearish mood.

The next oval on the chart shows how the market reacted to all the drama and worry over the "sequester." While not nearly as nasty as the first go-round, the 2012 encounter with the games congressional leaders play still resulted in a correction of almost 8 percent on the S&P 500.

Too Cavalier?

However, this time around the S&P has barely budged as the S&P shed just 4 percent from the most recent high. In short, it appears that traders have seen this movie before and know that the hero doesn't die in the end.

At the same time though, the bears have been suggesting that this time it may indeed be different. This time the Tea Party has cover. This time, the Democrats feel like they are #winning. And this time Boehner may have lost control. Thus, the glass-is-half-empty crowd suggests that investors may be entirely too complacent about what is about to happen.

In short, the bear camp reminds us that a default by the U.S. government would be insert-your-favorite-adjective-here.

The Real Deadline

But... As you might suspect, the team on the other sideline have a different view. While no one disputes the fact that the U.S. government defaulting on its debt would be a disaster of epic proportions for financial assets. However, according to the Bipartisan Policy Center, the real deadline for when the U.S. runs out of money isn't October 17. No, the BPC says the serious financial problems for Treasury start to show up between October 22 and November 1.

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Current Market Drivers

The State of the Trend

Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month) Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months) Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

The State of the Tape

The Early Warning Indicators

The State of the Market Environment

Weekly State of the Market Model Reading: Positive

Turning To This Morning...

Pre-Game Indicators

Thought For The Day...

Be not afraid of going slowly, be afraid only of standing still. -Chinese Proverbs

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The BPC says that the U.S. Treasury currently has about $40 billion in total cash on hand and available extraordinary measures and declining fast. BPC notes that the U.S. faces debt rollovers of $120 billion on October 17 and $93 billion on October 24. Then there are $12 billion of Social Security benefits due on October 23, $6 billion on interest due on October 31, and over $55 billion in major payments is due on November 1.

Yet, it is also worth noting that the Quarterly Tax Revenues will start coming into the Treasury coffers shortly.

But A Deal Would Definitely Be Helpful

The bottom line is each day that passes without a deal makes the situation worse.

Just yesterday, the U.S. was "Fitchslapped" as the 'AAA" rating of the U.S. was put on Ratings Watch Negative by Fitch Ratings. Fitch noted that although they continue to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.

Fitch summed up the situation nicely with the following: "The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This "faith" is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns."

While this may qualify as restating the obvious, the key is that it would be better for the credit rating of the country, the economy itself, and just about every American if lawmakers could just cut to the chase and get a darn deal done.

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The Games Being Played in Washington (I.E. the Gov't Shutdown and Debt Ceiling)
      2. The State of the Earnings Season
      3. The Outlook for the U.S. Economy
      4. The State of Fed Policy

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1695
  
• Near-Term Resistance Zone(s): 1725

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Positive
  
• Price Thrust Indicator:Moderately Positive
  
• Volume Thrust Indicator:Moderately Negative
  
• Breadth Thrust Indicator:Neutral
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Moderately Positive

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

The song remains the same this morning as all eyes remain fixed on Washington. The latest in the drama is the House did not have the votes to bring a new bill to the floor and thus, Senators Reid and McConnell are back to the negotiating table trying to hammer out a deal. The question, of course, is if any measure passed by the Senate can win approval in the House. Stock traders remain optimistic that a deal is close at hand as futures are pointing to a higher open on Wall Street.

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Japan: +0.18%
- Hong Kong: -0.47%
- Shanghai: -1.81%
- London: -0.48%
- Germany: -0.18%
- France: -0.82%
- Italy: +0.68%
- Spain: +0.04%

Crude Oil Futures: -$0.02 to $101.17

Gold: +$6.80 to $1280.00

Dollar: lower against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.718%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +6.84
- Dow Jones Industrial Average: +65
- NASDAQ Composite: +12.99

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

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Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.