The uncertainties that spooked the markets in September now are largely out of the way, chief among them is the Fed’s decision to refrain from any “taper” of its current bond-buying program. And while the market still is worried about when the Fed will actually begin to rein in the easy money, the issue is on the back burner, at least for now. On the front burner, however, is the pending political fight over funding the federal government and raising the debt ceiling.
This fight is likely to be bloody, with President Obama and Congressional Republicans ready and willing to dig in their respective heels. The acrimony also is likely to continue on through at least the first couple of weeks of October, and the uncertainty over the situation is probably going to take its toll on stocks in the short run. As such, I expect the market to sell off a bit until it becomes clear that a solution to the largely manufactured political brawl in Washington has played out.
Yet for traders with a little patience and a sense of history, the post political fight trade has been one marked with some very nice upside once the dust settles. In fact, over the past several years, there have been three significant pullbacks in the S&P 500 caused by political infighting. First, there was the 2010 health care fight and the passage of the Affordable Healthcare Act, a.k.a. ObamaCare. Then there was the debt-ceiling crisis in the summer of 2011, and finally the election in 2012 and the subsequent fiscal cliff debate. All of these episodes of political turmoil caused selling, but they also were followed by big gains in the market after the fight was over with.
Click to Enlarge I suspect that this scenario can, and will, happen again over the next several weeks, and that means the market could come roaring back after the next bout of selling. For traders, I think the way to play this situation is to wait a bit longer for the market to pullback as the political fight intensifies. Then, once the situation appears to be coming to a halt, it will be time to jump on the leveraged bull trade with a fund such as the ProShares Ultra S&P 500 (SSO), an ETF designed to deliver twice the price performance of its underlying index.
I wouldn’t jump on this trade just yet, as the fighting over the budget and the debt ceiling is just beginning in earnest. However, I am getting ready to buy SSO after the weakness, and on any hint of a conclusion to the next political brouhaha.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.