Will the debt ceiling resolution trigger the next market rally?

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We continue to put our idle money in our portfolio to work. For now, we’ll focus on additions rather than removals (although that could change based on new information). Once the debt ceiling issue is resolved, I think the market will be in a good position to recover during the second half of the year. Hopefully we’ll get that purely political headache out of the way next week. Let’s take a look at what’s going on this week…

(Enjoy this updated version of my weekly comment originally posted on May 25^he in it POWR Stock Newsletter Under $10).

Stocks have pulled back a bit and volatility has increased as we approach the debt ceiling. This is not a surprise (both due to the behavior of the market and the fact that the ceiling has not yet been resolved).

That being said, I still think there is less than a 1% chance that we will actually default on the debt. One way or another, something will work itself out.

Meanwhile, life goes on. Technology shares rose 2.5% on Thursday after big gains from NVIDIA (NVDA).

Speaking of NVDA, as overvalued as it is (trading at 218x earnings), the company has released some very positive news.

The stock is now valued at nearly a trillion dollars and is the fifth largest component of the S&P 500 (TO SPY).

The S&P 500 pulled back to its 50-day moving average before news from NVDA sent it higher again. It stays within the 2 standard deviation range that you can see in the chart above. Positive news about a debt ceiling deal could send the index up much faster.

Of course, as we get closer to the actual debt limit, volatility will increase and stocks will fall. Most people don’t believe there is a real default, but the financial markets have no choice but to react as we get to the end.

Not much significant economic news this week, although PCE comes out after this number is released. The metric (which is an alternative to the CPI in terms of looking at inflation) could potentially move the market if the results come as a big surprise.

Markets now have a 50/50 chance of a rate hike at the next Fed meeting in June.

We have a few more weeks until then, so obviously things can change. The PCE results may help convince the markets one way or another of what the Fed is going to decide.

Looking at the graph of iShares 20+ Year Treasury ETFs (TLT), bond prices have gone down again recently.

Keep in mind that bond prices move inversely to bond yields, so this move is likely due to higher rate hike expectations than we saw a few weeks ago. If there is a rate hike, I strongly suspect it will be the last of the year.

The VIX (the market volatility index) has risen quite a bit over the last week in response to the approaching debt ceiling. Again, this isn’t really a surprise given the circumstances. The index is still below 20, which is about the long-term mid-level. .

The 18-20 level on the VIX does not tend to be a place that the index stays at for long (as you can see on the chart above). It’s kind of a transition level historically.

Whether market volatility goes up or down depends almost entirely on what happens with the debt negotiations. We will know much more next week.

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All the best!

jay solooff
Chief Growth Strategist, StockNews
Publisher, POWR Stocks Under $10 Newsletter

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SPY shares were unchanged in after-close trading on Friday. So far this year, SPY has gained 10.25%, versus a percentage increase in the benchmark S&P 500 index over the same period.

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About the author: Jay Soloff

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

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