Getting out of the debt ceiling…


Now that the debt ceiling debate seems resolved, we could see more risk taking among investors. This is good for small stocks, like the ones we buy for our portfolio. Below, I take a closer look at what’s happening this week in the S&P 500 (SPY) and how it impacts our next move. Read on to find out more….

(Please enjoy this updated version of my weekly commentary originally posted June 1st in the POWR Stocks Under $10 newsletter).

The debt ceiling agreement passed the House and is expected to pass the Senate. This has been marginally good for equities, with the S&P 500 (SPY) up around 3% over the past week.

There are still a lot of worries about the economy, but it looks like the debt ceiling won’t be one of them.

It’s not really a surprise that the United States avoided a default (the consequences of which could have been catastrophic).

The real surprise is that Washington failed to strike a deal at the very last minute. The focus will now be on the Fed and the fight against inflation.

You can see in the chart above, the SPX (S&P 500 Index) is near the top of its two standard deviation range.

That doesn’t necessarily imply it’s going to pull back, but mean reversion is a real thing with stocks, so there could be some selling pressure in the near future – albeit short-lived, most likely.

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With the debt ceiling issues mostly resolved, tomorrow’s jobs report will be front and center for many investors.

The labor market remains solid, which is both good and bad. It’s good because people have jobs (obviously). This is bad because it makes it more likely that the Fed will continue raising rates to fight inflation.

The Fed does not seem to be in a hurry to raise rates at this stage, however. There is currently an 80% chance of a pause in rate hikes at the June FOMC meeting (according to the futures market).

However, there is a greater than 50% chance that the Fed will raise rates at the July meeting.

The Fed is trying to achieve a soft landing. That is, they want to fight inflation (bring it down) without torpedoing the economy.

I’m not sure this is possible, although it has been done in the past. We’ll have to wait and see if they can capture that magic this time around.

Volatility, as seen in the VIX chart below, eased over the final days of the debt ceiling debate.

However, you can see where the VIX is now approaching 15. Below 15 is generally considered a low volatility regime for the market.

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It is not uncommon for market volatility to ease as the summer holidays approach.

However, it is a bit different this year with at least one interest rate hike expected over the summer period.

Although the Fed has done a reasonable job of telegraphing its moves, further rate hikes could introduce some volatility into stocks over the coming weeks.

Ultimately, however, we may be approaching a period when investors are willing to take more risk on equities.

Lower volatility generally means investors will take more risk on smaller stocks and value names. It certainly implies good things for us, which is the area in which we tend to operate.

What to do next?

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All my wishes!

Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares closed at $427.92 on Friday, up $6.10 (+1.45%). Year-to-date, SPY has gained 12.32%, versus a % rise in the benchmark S&P 500 over the same period.

About the Author: Jay Soloff

Jay is the Principal Options Portfolio Manager at Investors Alley. He is the publisher of Options Floor Trader PRO, an investment consultancy that offers you professional options trading strategies. Jay was previously a professional market maker on the CBOE floor and has been trading options for over two decades.


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