For weeks the news media and various government officials have talked about dire consequences if a deal is not made on the debt ceiling. Treasury Secretary Janet Yellen warned of a deep recession and a painful selloff in the stock market.
Despite these warnings, the market has been unconcerned. There were a couple of bouts of nervousness, but market players were confident that a deal would be made despite all the hostile rhetoric. The Nasdaq closed Friday at its highest point since August 2022, largely due to excitement about artificial intelligence.
Now the outline of a deal is in place, and both sides are working to line up the necessary votes. The likelihood is that it will pass, but what will be the market response?
This is a classic setup for a "sell-the-news" reaction. The market has been anticipating a deal, which has already been discounted to some degree. Market players that have been looking for this news to hit are now in a position to lock in some gains into the strength.
In addition to sentiment, there is another issue that creates selling pressure on the news. The Treasury Department needs to raise cash and will sell bonds to build up its depleted bank accounts.
While the debt-ceiling deal was being negotiated, there was a surplus of cash in the market that flowed into equities. Big-cap AI names were one of the primary beneficiaries. That cash will now start to flow back into bonds. The 20+ Year Treasury Bond ETF (TLT) is already indicated higher by about 0.8% Tuesday morning.
While conditions for selling into the strength are good, there are a couple of things that may help to keep stocks sticky to the upside. Foremost is that an AI bubble appears to be gaining more traction. Nvidia (NVDA) is indicated 3.6% higher in the early going on new products, and the Nasdaq 100 ETF (QQQ) continues to outpace the rest of the market as cash flows into the hottest technological development since the internet.
Markets that have this sort of momentum tend to stay sticky to the upside. The strong action creates a supply of market players that want to buy dips and pullbacks. They are rooting for a sell-the-news reaction to get better entry points on the names they want to buy.
Typically, dip buyers are very aggressive on the first pullback but then slowly lose confidence when bounces fizzle out and fail to gain momentum.
There is consumer confidence data Tuesday morning at 10 a.m., and there is jobs news later this week that will cause a market reaction. The next Fed meeting is on June 14, and currently, the odds favor another 0.25% hike.
The strangest and most difficult thing about this market is that the bulls are celebrating bubble-like action in a small group of big-cap technology names leveraged toward AI while the bears focus on the 80% of stocks that are lagging badly.
Early indications Tuesday are positive but not euphoric.