by bitkogan
Nothing much has happened in the markets yet, and that may well indicate a problem. Typically in May, market activity is quite high. This year, however, the month feels more like the late July and August vacation season. Whatever it is, it isn’t a good sign.
Traders are waiting, trying to understand what the eventual outcome will be. On the one hand, we have a massive amount of negative data:
- High stakes.
- An extremely precarious situation in the banking sector.
- Uncontrolled inflation.
- Risk of default.
- An approaching recession (if in fact it has not already arrived).
- Tension in the corporate debt market. Growing potential for corporate cash gaps. High yields on junk bonds.
- Huge and most likely largely unsolvable problems in the commercial real estate sector.
- Layoffs at large companies.
On the other hand, everyone knows that as long as the public debt ceiling issue remains unresolved, high risks of default persist. If and when the parties reach an agreement, however, it could immediately remove one very large potential risk from the equation. While the politicians continue have agreed in principle to find common ground and continue to engage in negotiations, they still seem to be hitting a wall.
Is it possible that the first hints of a potential agreement on raising the debt ceiling will cause the market to surge and lead to massive short position closings? Perhaps taking the S&P index up to, say, to 4250? Yes, it’s quite possible. And we need to be prepared for it internally, even if nothing in the market game is ever a guarantee.
Conclusion:
If the parties can reach an agreement, we may see a significant short squeeze, as many investors have built up short positions, and the market could exhibit a sharp short-term rise.