Yesterday's letdown by and shutdown of the government ended up a positive for the S&P. That is how the game is played. Everyone sells into the event and once the news is out the markets go back up. While part of yesterday's buying was new money being put to work on the first trading day of the new quarter, most of the buying was the shorts getting squeezed out again. Guess what? It's not over yet. After yesterday's early afternoon selloff and bounce back up, we just do not get the feeling that it's going to be a one-day rally.
The current government shutdown is completely unnecessary and does not help the case of the U.S. dollar around the world. There are so many things in play and we are not talking about the Army/Navy game being canceled. There are many unanswered questions:
How will the federal government shutdown affect the U.S. economy?
How long will the federal government shutdown last?
What will be the effects on business and consumers?
What about this Friday's employment number?
What about the debt ceiling and the government running out of money on Oct. 17?
What about the Fed's taper?
As traders we are always questioning and probing. Whether it's the latest headline or a big move down in the gold we are always searching for answers. Right now traders are searching for answers from the government and not getting any. While this is not looking like just a one-day event, we do think this will end up like all the "I can't buys" over the last few months- going higher.
The most important thing a trader can do when looking at the government shutdown is to remember that the news is out and the short sellers have already voted. After all the huffing and puffing, the ESH (e-mini S&P) was trading 1692 in Globex at 6:00 pm Tuesday evening, only eight handles off the "big figure" at S&P 1700, but back down hard this morning.
Sure, the S&P will be susceptible to headlines, but at the end of the day we just don't think a prolonged government shutdown serves either party's interest. Expect a two-way trade but lean to buying weakness. Lastly, one would have to think that the current shutdown (especially if followed by a debt ceiling fight) will affect the Fed's taper plan, if you can call it a plan. If the shutdown continues, it will drag the U.S. into a downgrade and that will keep the Fed printing presses going well into next year.
As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.
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