Debt Deal Done: Will the U.S. Get Downgraded?

Well, well. Congress did it. And more than a full
day ahead of Treasury Secretary Geithner’s absolute deadline on Tuesday,
August 2. I will admit, I’m surprised. Not that they reached a deal —
after all, I playfully wagered my entire business that a deal would get
done with High Yield
Wealth
editor Steve Mausy. But I figured it would be a
midnight deal.

Of course, nothing is signed, sealed and delivered just yet. I expect that
may not happen until this evening. But the rhetoric from Congressional
leaders and the president suggest the signatures are a
formality.

Tech Market Heats Up: What

Congress and the Obama administration are at it
again. Talks broke down over the weekend, which is a familiar development.
The impasse is certainly weighing on the stock market.

Precious metals are rallying, bonds and stocks are down. Of these assets,
it’s the move in bonds that are most telling. Bond prices are falling, and
yields are rising, because failure to pass a budget opens the door for a
downgrade of U.S. debt from the ratings agencies. That, in turn, raises
borrowing costs (interest rates) because repayment is suddenly less
certain.

What We Can Learn from American Airlines (AMR)

Earnings season continued at a torrid pace, with
large cap stocks beating on revenues and/or earnings per share. The EU
finalized a bailout plan, and reports seem encouraging that Congress will
reach a budget deal soon.

We’ve had to suffer through a perfect storm of bad news since May. Now, we
seem to be getting a perfect storm of good news. Even the most recent
housing construction data was better than expected.

Unemployment, however, continues to lag. And as we’ve discussed at length,
there’s no reason to expect hiring to improve significantly, especially
with spending cuts coming at the federal level.

Are the Sellers Done?

So far this year, the S&P 500 has dropped 3% or more in one session 3 different times. The two previous times, it clawed back some of the losses over the following week. We’ll have to wait and see of there is any upside after yesterday’s big drop.   

 

The S&P 500 is now testing the lows from the “flash crash” on May 6. This is interesting because it was assumed that trading that day was something of a fluke as computer trading programs went haywire. But now that stocks are back to those levels, we must consider that the drop may not have been a fluke.  

 

The question now is: can stocks find some strength? Or perhaps a better way to ask the question is: are the sellers done?