Don't Get Too Excited

 | Aug 01, 2011 | 8:37 AM EDT  | Comments
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"Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."
--Samuel Johnson

We knew that a gap was likely this morning, depending on what happened in Washington over the weekend. The bulls are celebrating. It isn't a done deal yet, as a vote in the House is still necessary. While the far right and the far left won't support the bill, it looks like there are enough votes in the middle to put it in the hands of President Obama.

We are looking at a good-sized gap up in the early going, but we aren't close to being back to where we were Tuesday night, before the debt drama really gained steam. The market isn't going to reverse the damage done last week so easily. A number of other issues have popped up recently and they are going to make buyers hesitate, even if they completely shake off the damage done by this debate.

Once a debt bill is passed and signed, there's still some risk that the ratings agencies will cut U.S. debt. They made it clear that a deal to raise the ceiling wouldn't be enough if there wasn't progress to make structural changes as well. Most analysts believe the ratings agencies will back off for now, but that risk is still there.

The other major obstacle is the lousy economy. The poor GDP number Friday was overlooked during the debt debate drama, but all agree that it was disappointing and does not bode well. The economic numbers have been consistently disappointing lately and we have had a very mixed earnings season.

I don't want to sound too gloomy, as it is a major positive to have this debt debate over with finally. The market hates uncertainty, and at least we can focus on other issues now. While we might not have ideal fundamental conditions in place for a sustained uptrend, at least we can move on to the next set of issues and deal with them.

It is important not to get too excited about this gap up. There is still some political wrangling to be done, and we may see a little choppiness. Even after the deal is done, we'll have to see how much real buying there is. Flipping into early strength is likely, but the real test will be the degree of buying interest on early pullbacks. If the dip buyers don't show a high level of interest quickly, it is going to be tough going. But if they jump in on minor pullbacks, the chase will be on.

It is very likely that many market players are lightly invested after the poor action last week and they are going to be looking for entry points. It is very important to stay selective and not panic. Emotions will cool quickly and the better technical patterns will come to the forefront fast. If you have a shopping list of stocks that were beat up last week, now is the time to start looking for entry points -- but it is important to move incrementally and to watch for signs that a sustained rally is likely to develop.

Regardless of what the market ends up doing, it is going to be a relief not to hear about this debate anymore. Hopefully, we will be less headline driven and can focus more on individual stock picking instead. We'll see how the mood develops, but we definitely have to look for entry points with this debt uncertainty lifted.

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