The markets tumbled from a massive gap higher this morning. Last night, President Obama gave the nation the news. An agreement had been reached to raise the debt ceiling and cut spending. The S&P 500 futures spiked dramatically, trading over twenty points higher. This morning, the SPDR S&P 500 ETF (NYSE:SPY) opened up over 1% higher, at $130.84. However, no sooner did it open, the markets started to collapse.
The reasons for the drop were multiple. First, the deal must be voted on and passed by the House and Senate. With no political party very happy with the overall compromise, profits were taken early by those that did not want to risk a non passage of the bill. In addition, the cuts over 10 years totaled $2.8 trillion. This is slightly below what rating firms S&P and Moody’s had asked for to keep the U.S credit rating. This $2.8 trillion in cuts ups the possibility of a debt rating downgrade. Lastly, the ISM Index for July reported in at 50.9. This shows significant slowing and a possible new recession brewing.
These factors killed the markets. A huge gap higher quickly turned into steep losses for all the major indexes. The SPDR S&P 500 ETF (NYSE:SPY) is now trading at $128.41, -0.92 (-0.71%), the PowerShares QQQ Trust, Series 1 (NASDAQ:QQQ) is trading at $57.61, -0.39 (-0.67%) and the SPDR Dow Jones Industrial Average (NYSE:DIA) is trading at $120.54, -0.59 (-0.49%).
The moral to this story is simple. Sell the rallies. Europe is still a mess, the United States will ultimately get downgraded and the economic numbers are dismal. Should the vote pass today, the markets should see a pop. However, upside may be short lived and continue to take profits.
Related: PowerShares DB US Dollar Index Bullish (NYSE:UUP)
Gareth Soloway
InTheMoneyStocks.com
