Buy Into Weakness Caused by the Budget Crisis

by Sam Collins | September 27, 2013 2:01 am

Markets rose modestly on Thursday, breaking a five-day losing streak for both the Dow industrials and the S&P 500. For the Dow, the reversal snapped a loss of 2.8% from a record high, which occurred last week.

The biotechnology sector led the advance, as illustrated by the 1.7% gain in iShares Nasdaq Biotechnology ETF (IBB[1]). Although the rally after five days down was not strong, the gains were broad with nine of the 10 major S&P sectors advancing. Only the financial sector had a slight pullback.

At Thursday’s close, the Dow Jones Industrial Average gained 55 points at 15,328, the S&P 500 rose 6 points to 1,699, and the Nasdaq gained 26 points at 3,787. Volume was light with just 602 million shares trading on the NYSE and 419 million on the Nasdaq. Advancers led decliners on both exchanges by about 1.5-to-1.

TLT Chart
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Chart Key[2]

Despite uncertainty, there has been no rush to buy bonds as a safeguard. The recent double-bottom in the iShares Barclays 20+ Year Treasury Bond Fund (TLT[3]) was made as a result of the Fed’s decision not to taper, coupled with an unrealistically oversold bond market. 

XLK Chart
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Meanwhile, the chart of the Technology SPDR (XLK[4]), a relatively high-risk ETF, is in a powerful bull channel. Volume has declined since July, and MACD is close to a short-term sell signal. But there is no evidence of panic and buying persists. Nevertheless, there is room within the broad bull channel for a modest correction.

Conclusion: Investors hate uncertainty, and what could be more uncertain than the negotiations over the U.S. budget and the possible shutdown of the government? And yet, stocks have performed relatively well with the major indices hitting new highs just a week ago. But is this so unusual? 

The Wall Street Journal recently pointed out that a slight sell-off just prior to important deadlines is “par for the course,” saying, “Stocks have tended to drop in the 10 trading days before a potential government shutdown and then rebound in the 10 days after a shutdown resolution was reached.” The conclusion was taken from the analysis of 17 instances dating back to 1976. 

The message is clear: Buy into future weakness caused by the current budget crisis. The bulls’ power is not likely to be halted by the current political climate.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. IBB:
  2. [Image]:
  3. TLT:
  4. XLK:
  5. click here:
  6. click here:

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