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Caution: A Convergence of Contrarian Indicators

The WFC earnings report, along with the Reuters report that Apple (AAPL - Get Report) has almost halved its order with suppliers due to weak demand, will probably mean an ugly Monday. Look for across-the-board weakness in financials, via SPDR Financial Sector ETF (XLF) for example, or the general market, via SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 Index ETF (SPY), PowerShares QQQ Trust, Series 1 ETF (QQQ), or the inverse equivalents ProShares Short Dow 30 ETF (DOG), ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ).

Caution: Inverse ETFs may result in significant mismatch over longer time horizon. Detailed study and close monitoring are recommended.

While the week will be dominated by earnings and a sleuth of scheduled Fed speeches, one longer-term fundamental may very well make the cautious picture painted above materialize: debt ceiling. Last week I wrote that the risk on debt ceiling is very high. Since then I've come to realize, much to my astonishment, that most people talk about the debt ceiling risk in the sense of it being broken!

No, as I argued last week, there's no chance of that. The risk, rather, is that debt ceiling is raised without any meaningful spending cuts, thus getting a ratings downgrade, or at least the very clear threat of it. Unlike the last downgrade, when global worries counteracted the action and made a joke of the raters, this time it's very likely to stand out like a sore thumb that it is.

But that is two months away. As we get much closer to it we will see how the market decides to pay attention to it. Mark your calendar, though.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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DIA $178.81 0.89%
SPY $210.68 0.95%
XLF $24.83 1.10%
AAPL $117.34 -0.81%
WFC $55.71 1.11%


Chart of I:DJI
DOW 17,888.35 +168.43 0.95%
S&P 500 2,102.63 +22.22 1.07%
NASDAQ 5,156.3060 +47.64 0.93%

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