How to Fight the Debt Ceiling Paralysis

iSPYETF

Deal or no deal? 

Rumor has it that the Senate reached an agreement that would be supported by the President if the House and Senate approve it.

The debt ceiling debate has become the center of the financial universe and perhaps the location of the next ‘big bang.’

Until we know the final detaisl of the deal, here's what investors can do.

Soul Searching

Betting on events yet to happen or on decisions yet to be made is like gambling. 

If you are a gambling kind of investor, you’re in luck. Get ready to place your bet.

If you are a conservative investor, you may have some work to do. An ounce of prevention is worth a pound of cure. I think there's a real chance that even the best case scenario solution may cause a sell off.

Financial Insurance

Protecting your portfolio is like buying insurance for your home or car. You probably won’t need it, but if you do, you’re glad to have it.

There’s always a cost component to prevention, protection and insurance. Are you willing to spend some of your money or give up the potential for further gains in exchange for security? If security is your goal, you should be. 

Protection

If you don’t like to lose, don’t play. If you’re afraid of financial losses, move into cash.

Alternatively, you may decide to hedge your portfolio. The easiest and most cost effective way to hedge your portfolio is with options.

For example, if you own 100 shares of the S&P 500 SPDR ETF (SPY) worth $17,150, you could buy a November put with a 171.5 strike price for $181.

This would give you the right to sell SPY for 170 at any time before the third Friday of November (regardless of where SPY actually trades). The cost of the protection is 1.06% of your SPY holding.

100 shares of the PowerShares QQQ ETF (QQQ) could be protected for $89 or 1.10% of your QQQ holdings (November 80 QQQ put).

100 shares of the Dow Diamonds ETF (DIA) could be protected for $167 or 1.09% of your DIA holding (November 153 DIA put).

You may also use put options to protect the iShares Barclays 20+ Year Treasury Bond ETF (TLT).

Random Thoughts

Everyone’s expecting a market crash if there’s no agreement on the debt ceiling issue by Wednesday night. But the market rarely delivers on the expectation of the masses. 

According to Congressman Ted Yoho, not raising the debt ceiling does not automatically trigger a default. Why? 

Regardless of the debt ceiling (which allows the government to borrow more money), the U.S. government takes in $250 - $300 billion a month, enough to service most of its debt.

Even if the U.S. were to default on its debt, it could be labeled a technical default, because it would be the result of the government’s unwillingness to pay, not its ability.

A technical default would mainly affect the prices of Treasury bonds (Chicago Options: ^TNX) that mature or have coupon payments coming up.

Everyone is expecting stocks to rally if an agreement is reached. The old adage 'if it's too obvious, it's obviously wrong' comes to mind. Now may not be the best time to chase stocks.

Comprehensive Damage Report

Obviously the sad display of political brinkmanship is a wild card, but I don’t try to predict the unpredictable.

I always consult and rely primarily on my ‘three pillars of market forecasting:’ Technical analysis, seasonality and sentiment.

Technical analysis identifies the must hold support along with ‘should hold’ support. Trade below ‘should hold’ support will be an early warning signal. It's also worth noting that the Nasdaq-100 has reached our long-term resistance and target (click here to read a prior article on the Nasdaq target). 

‘Should hold’ support is discussed here: S&P 500 technical analysis (must hold support is available to Profit Radar Report members).

Seasonality for the remainder of the year is looking bullish with a chance of ‘bearish showers’ in the second half of October. Click here for a detailed S&P 500 seasonality chart.

I tend to de-focus away from unpredictable events and rely on what we know. Based on technicals, the trend is up as long as trade stays above support.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 



More From iSPYETF
View Comments (0)