Congress' irresponsibility will cause market swings today

By Danny Riley

I have to be honest: I am stunned that today is October 16 and while some in Congress continue to fight Obamacare, which is the law, the government is still shut down. It’s not just all the people out of work and unable to pay their bills, but everything is getting affected now.  After yesterday’s close, Fitch Ratings, the global credit rating agency whose office is four blocks from ours, took steps toward cutting the U.S. government’s AAA  debt rating. 

As always, I admit when I am wrong, and I was wrong on this one. I did not think this would happen and now we are over two weeks into the shutdown and we have one day until the U.S. is officially in default.

Congress plays, we all pay

In all honesty I think the U.S. deserves the downgrade. The mishandling of such an essential part of our economic activity and the inability of both parties to come together show how fractured our system is. As I have said many times in the past: Wall Street threw a big party and we were not invited. But we have to pay for it.

Now Congress is playing games instead of doing its job. And again we will pay. Goldman-Sachs estimates that the shutdown will lower Q4 GDP to a mere 2%, stunting the recovery that should accompany a stock rally like we’ve had this year. As the deficit reaches $17 trillion, it’s hard to understand how something so important has to go down to the wire.

Our view

After the S&P closed down three in a row — Oct 7 -17.10 , Oct 8 -17.3 , Oct 9 -1.6 –and despite the no deal government, the S&P has come ripping back: Oct 10 +36.2, Oct 11 +14, Oct 14 +5.3, Oct 15 +12.3. That’s a gain of nearly 68 handles in just four sessions.

Today the Ned Davis stats improve again. According to the S&P cash study, the Wednesday before the October expiration has been up 16 times and down 13 of the last 29 occasions. Thursday has been up 17 / down 12 of the last 29 and Friday is back to 16 up / 13 down.

Are the stats right all the time? No, but so far the stats called last Friday’s up day, Monday’s up day and yesterday’s down day. Are the moves all due to historical patterns? Probably not, but so far the stats are 3 for 3.

It’s not that the S&P can’t go higher. It can, but after a nearly 70-handle rally in less than 4 days the risk of “selling the news” increases greatly. We think it highly likely the government will announce some type of deal today, and when they do the S&P could rally 20-30 handles in one blast. As soon as the algos lock onto the headline, the upside buy stops will be dead meat. We also think traders should be careful. Whichever your directional bias, make sure you have your stops in.