Well, here we are. It is day "2" of the government shutdown and the market is once again shrugging off the hysteria that has taken over the media the past two trading days. Equity index futures have bounced from the lows that they hit earlier this morning, with the December S&P E-mini contract currently trading down .37% at 1683.25 as we approach the final minutes of the trading day. This is a full 10 points higher than the low of 1673.25 it hit right at the open of trading. Once again, getting close to the key 1670 level that we have discussed in recent days, and bouncing.

In the metals we saw a significant bounce today from the intense selling pressure in both the Silver and Gold December contracts yesterday. Yesterday's move was one that left many traders scratching their heads, as most thought the government shutdown would have played right into the "gold bugs" hand. Instead, we saw Dec. Gold quickly approaching that 1280 level yesterday, only to bounce back over 2% today to 1320.70. We saw a similar bounce in Dec. Silver today as it rallied up to 21.897 from the 20.63 low that it hit yesterday. Should the government shutdown progress beyond this week, I would think that both gold and silver would continue to benefit as they did today.

Otherwise, I tend to believe that the equity index markets will begin to lose the patience that they are displaying at the current moment if the shutdown begins to meld into debt ceiling talks, which would put the US at more economic risk than we have seen in a long time. While the government shutdown is newsworthy and keeps a steady stream of eyes on the major media networks, a failure to raise the debt ceiling is what I would consider to be the "real deal" in terms of event risk. A failure to increase our debt limit, which essentially means a refusal to service obligations already incurred, would be unchartered water for this country.

Looking back to the 2011 debt ceiling debate, which resulted in a downgrade of our debt by Standard and Poor's to AA+, we experienced a 16.5% drop in the S&P over a 2 week period, with 5.6% of that coming in one day. And that was on the heels of a debt ceiling that was in fact lifted 4 days previously. So who is to say what the impact might be to financial markets this go round. Thus, we continue to move forward under the assumption that the markets will remain volatile and are hedging ourselves accordingly. Prepare for the worst...hope for the best.

Travis McGhee


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At the time of publication, Travis McGhee held positions in SPY, SLY.

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