The Senate reached a deal to put government workers back on the job and avoid a debt default, and the stock market responded with a broad-based rally while Treasury yields hit the skids.
While, as of this writing, the House of Representatives has yet to approve the deal, Speaker John Boehner appeared to indicate that the Senate plan would pass the House. The agreement calls for an extension of the debt ceiling until Feb. 7, a funding of the government through Jan. 15, and maintaining the automatic spending cuts.
Stocks opened higher and held their gains throughout the day as the political deal evolved.
At Wednesday’s close, the Dow Jones Industrial Average gained 206 points at 15,374, the S&P 500 rose 23 points to 1,722, and the Nasdaq was up 45 points at 3,839. The NYSE traded 751 million shares and the Nasdaq crossed 426 million. Advancers beat out decliners on the Big Board by 4-to-1, and on the Nasdaq, advancers were ahead by 2.5-to-1.
The widely followed S&P 500 index closed above resistance at 1,710 for the first time since early September, and its MACD internal indicator flashed a strong buy signal. Under normal circumstances, this combination should quickly result in a blast to new highs.
The economically important Dow Jones Transportation Average has maintained a bull channel since late last year. And Wednesday it not only maintained its trend but set a new all-time closing high, accompanied by a new MACD buy signal. This is telling us that the next nine months should maintain the steady economic growth of this year.
With a tentative deal in place that expires in three months, there is a strong likelihood that the Fed will continue with its quantitative easing in the form of bond purchases through at least January. With this in mind, and with the government avoiding a possible immediate default, bonds were strong, driving the yield on the 10-year Treasury to 2.67%.
Conclusion: Stocks rallied Wednesday, but they have experienced a 5% run in just over a week. We could get some follow-through for the remainder of the week. But now that the pressure is off, the saying “Buy the rumor, sell the news” could present investors with another problem — a deep round of profit-taking.
Thus, traders are encouraged to sell on further strong rallies, but investors should hold current positions, protecting them with covered calls and other defensive strategies. My guess is that after this round of selling has exhausted itself, another great opportunity will present itself, and we will end the year with a strong rally.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.