Trading the Debt Limit Resolution (or Debacle) Weekend

As President Obama and Congress approach the “Debt Limit Deadline,” there are a number of potential trading scenarios to consider, but there is one approach that won’t work.

It’s possible that “everything will be okay” and the stock market will rise. It is also possible that “everything will be okay” and the stock market will fall. This is known as “buy the rumor, sell the news.” There is the possibility that one or two more cries of “the sides are too far apart to reach a deal” will cause the market to gyrate up and down before settling on a direction. And then there is the possibility that talks will actually break down so that no resolution is reached by the deadline, in which case the market could either rise or fall.

While such uncertainty is far from unique, the debt-limit debate has been highly publicized; and the outcome of this weekend is likely to be a particularly emotion-packed event. Trading in the face of such uncertainty generally requires a dispassionate approach. Traders are well advised to “listen to the market.” Look for signs of excess in advance of the ultimate outcome. Maybe there will be buying on the rumor so you can sell the news; or just the opposite, selling on the rumor so you can buy the news.

The approach that won’t work is sticking stubbornly to a directional opinion. The trader who says, “I know what will happen and how the market will respond” is making a 50-50 trade. The art of trading, however, involves being flexible. This weekend, the only thing a trader can “know” for sure is that anything can happen – including nothing.