Tuesday, October 8, 2013

Timing the Debt Ceiling

We are now in the middle of debt ceiling politics, before the final phase when negotiations begin.  Right now, both sides are waiting for the other to blink first.  It is a game of chicken, as you get closer and closer, one side will move out of the way.  It is a collision course until someone becomes the chicken little.  Until Monday, it was just assumed that the debt ceiling would be raised without too much disturbance to the markets, an inevitability.  But politicians don't feel the heat until the stock market starts going down, not 1%, but 2-3% at a clip, and fear rises.  We are still in the 1% down stage, but we could have a quick 30 drop lower which would get the politicians attention.

In some ways, you almost need the market to go down before you get action.  If the market just remains sanguine, as it has, then the politicians take their time which only will make investors more nervous the closer we get to October 17.  I believe there is a puke move lower within the next 3 trading days, which should take us below 1650 momentarily.  That will be the moment to buy the dip, not now.  But I don't think we suddenly skyrocket after the debt ceiling deal, I just expect us to go back to range trading the 1680 to 1710 area.  It may just be better to short volatility instead of buying the market, as volatility is quite expensive at these levels, with realized vol not even close to implied vol.

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