Markets Heading Higher on Bridge Deal a Bad Sign

By George Leong.

A bridge deal on the impasse and debt ceiling was reached in Washington on Wednesday. The deal will see the government reopen until January 15, and the debt ceiling will be extended until February 7 to allow both sides to try to hammer out a deal.

Now of course, the agreement doesn’t mean everything is rosy in Washington. A deal for the budget and an increase in the debt ceiling must still be forged. The extension of the deadlines just gives time for a deal to be ironed out and for the country to avoid an embarrassing default.

Yet the constant barrage of news on any developments towards the debt ceiling will continue to impact the stock market, as we move through the fourth quarter and into the New Year.

The stock market clearly favors the extension, as we see the stock markets rise on the news. Now, the Federal Reserve won’t likely begin to taper until after Ben Bernanke leaves office in January and, in fact, we may not see any tapering until later into 2014 under the direction of the next Fed Chairman Janet Yellen. The easy money will help support the stock market, but for further gains, there must be a fresh catalyst to drive stocks higher.

For investors, this doesn’t mean the stock market will continue to rally at the same rate. In fact, with the extension, perhaps traders could finally focus on what’s important: think third-quarter earnings and revenues, jobs, and the upcoming Black Friday and holiday shopping season. If these metrics pan out, then I would expect the stock market to advance higher into 2014. Ultimately, the current rise in stocks needs to be justified by the fundamentals, which has yet to happen.

The S&P 500 moved within eight points of another record high on Wednesday morning, while the small-cap Russell 2000 and NASDAQ continue to lead. I think the easy money has been made. For investors, waiting to buy on market weakness would make the most sense, as the upside may be limited at this time versus the higher risk of downside moves.

Never mind the continued easy money from the Fed, we need to see the economy and corporate America deliver results that support the rise in the stock market.

Only under this scenario can we expect the stock market to edge higher and a buying opportunity to surface. On the other hand, failure to achieve these goals could send the stock market tumbling back downward, in which case, you should also look at liquidating some positions.

This article was originally published at Investment Contrarians