Make no mistake about it; Monday’s stock market was all about debt. There was the talk of possible debt restructuring in Greece (which would mean at least one sovereign debt default), rising rates at Spain's T-Bill auction, another hike in the reserve requirement in China, a downgrade of Ireland's banks, talk of the EU's bailout program hitting snags, and most importantly, and S&P's downgrade of the outlook rating on debt right here in the good 'ol US of A.
While no one really expects the U.S. to default, the downgrade of S&P's rating outlook from "stable" to "negative" could prove to be a game changer for the market. Remember, this game is about confidence. And if confidence starts to droop or uncertainty creeps into the mix, well, all those Wall Street analysts looking for big gains in the stock market this year might begin to rethink their view.
While the bears did their level best to scare the bajeebers out anyone holding long positions on Monday morning, things didn't really turn out all that bad. Sure, the Dow was down 250 points at one point. But instead of collapsing and/or snapping what appeared to be fragile support zones, the bulls managed to get their act together in the afternoon. Thus, instead of a scary decline that in and of itself could have been a game changer on a chart basis, Monday's mayhem may turn out to be just another test of support at the 1300 level.
The bulls argue that there are exactly two chances that U.S. debt could actually be downgraded: slim and none. Our heroes in horns point to the action in the bond market, which actually saw yields fall as the day progressed, as well as the VIX, which failed to perk up on the purported game-changing event. Those looking at the bright side also suggest that S&P's move may wind up being a good thing if it can get a politician or two riled up enough to actually get something done about the debt and the budget.
However, on the other side of the court, the bears could be heard telling anyone willing to listen yesterday afternoon that this thing (i.e. the corrective phase the markets finds itself stuck in) isn't over. Our furry friends point out that the austerity kick, which seems to be all the rage in Europe these days, is sure to catch on here. The only problem is that less spending means less economic growth, which, in turn, could easily mean lower profits for corporate America. Now toss in the President's plan to hike taxes on anybody making a little money and it isn't hard to see how stocks could encounter a problem from a big-picture perspective later in the year.
But for now, the fact that stocks didn't collapse on Monday tells us that traders want to see some more earnings before throwing in the towel. So, with Goldman Sachs, Johnson & Johnson, CSX, Intel, IBM, and Yahoo all reporting today and a steady stream of results continuing for the next couple weeks, we're still of the mind that if there is going to be a game changer in the near-term, it will likely come from the collective guidance and corporate commentaries from the earnings parade. So stay tuned and keep your ears to the ground.
