Wall Street Isn’t Buying Obama’s Doomsday Scenario

October 9, 2013 4:56 PM0 commentsViews: 8870

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Markets sold off sharply yesterday as the rhetoric surrounding the looming debt ceiling escalated. The S&P500 (^GSPC) dropped 1.2% to 1,655; the lowest close in more than month. Despite the worst single day drop since the current sell-off began, most traders remain skeptical that the similar debacle in summer of 2011 will play out. Traders and investors who ran for the exits when the S&P 500 dropped 18% over three harrowing weeks in late June and early July of 2011 missed a huge subsequent rally. It was a hard lesson, still fresh in the mind of investors. If DC wants to get investors to bail they’ll have to do better than what we’ve heard over the last few weeks.

Jon “Dr. J” Najarian of OptionMonster points to the CBOE Volatility Index (^VIX) as evidence of Wall Street’s apathy. Despite gaining more than 4% in trading on Tuesday the so-called “fear index” finished at 20.34. For comparison’s sake, in the summer of 2011 the Vix spiked to over 25. Going into the fiscal cliff at the end of 2012, the Vix’s closing peak was 21.8.

The situation is fluid but for the most part “traders think this is just political theater likely to end in a lousy deal,” Najarian says. In other words, Wall Street is betting this time isn’t different from the last.

Lost in that line of reasoning is that the last time we had a heated debate over the debt ceiling was pretty grim. As it stands the S&P is less than 3% off the highs. In 2011 the total drop was six-times as large. It’s one thing for traders to talk big about buying the dip now. It’s going to be interesting to see how tough the talk is if and when the sentiment morphs from “buy the dip” to “protect your gains.”

None of which is to say the debt ceiling mess isn’t a travesty. Beyond just being an international embarrassment that puts America’s status as the global safe haven at risk, having the government come to a near total stop justifies Bernanke’s open-ended quantitative easing program and all the brutal implications that come with it.

“I’m not a huge fan of QE,” understates Najarian. It steals from people on fixed income and the middle class and pushes their money into the hands of the middle class. It’s a national disgrace but it’s also bullish for stocks. You don’t have to like it but investors are always better off playing the tape they have rather than holding out for the one they want.

Sell-offs tend to follow a standard order. First the momentum names get smacked then the rest of the market falls in reverse order of quality. Yesterday saw some 2013 favorites take a beating. It remains to be seen if it’s going to be enough to bring out organic fear among traders.

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