6 Market Indicators to Monitor Throughout Debt Ceiling Debate

Debt Ceiling and What to Expect

By Brian B., VP of Trader Segment Strategy and Guest Blogger

With the government shutdown in full swing and the debt ceiling crisis looming, many traders are wondering how Congress will address the country’s borrowing limit and what it will mean for the market.

In August, Treasury Secretary Jack Lew stated that Congress will need to make a decision by mid-October to avoid default and face another credit downgrade like the one we saw in 2011.

Two years ago, we saw major volatility in the market leading up to and following the S&P downgrade of the U.S. credit rating from AAA to AA on Aug. 5, 2011. Prior to that Friday, the major indexes experienced substantial swings as seen in the table below.

Data collected by Scottrade’s Trading Services Department

The downgrade of the U.S. credit rating was an unprecedented event. There was a strong sell-off the day after S&P announced the downgrade as traders rushed to exit the market. Later in the week, the market began to correct as market participants digested the downgrade.

Data collected by Scottrade’s Trading Services Department

While many analysts don’t believe the U.S. credit rating will be downgraded again, the market may still see higher-than-normal levels of volatility. Here are six things you may want to consider if you’re looking for potential short-term opportunities during volatile periods:

  1. Short Activity – Short sale activity can provide an indication of market sentiment and be used to gauge expectations and potentially spot opportunities around a specific security. An increase in the short-interest ratio can indicate that investors expect a stock’s price to decrease, while a ratio decrease can indicate an anticipated rise in price.
  2. Put-to-Call Ratio – An increase in the put-to-call ratio can indicate that investors are moving more money into put options rather than calls either because they’re expecting the market to move lower or they’re starting to hedge their positions. When spikes in the ratio occur or when the ratio is outside the normal trading range, traders may start looking for new short-term opportunities.
  3. Weekly vs. Standard Options – Because weekly options expire that are listed to provide expiration opportunities every week (while standard options expiration is the Saturday following the third Friday of the month), they offer a greater variety of expiration dates that can potentially help you target a specific short-term event. For example, you may select an option that expires the week of an anticipated earnings announcement or economic report. It’s important to realize, however, that you have less time to move toward your strike price with weekly options, which may make them unfit for your strategy.
  4. Top Performers – Some traders use the market’s top performers to gauge overall market sentiment and anticipate upcoming movement. In times of volatility, they may look for directional indications from these market leaders and keep an eye out to see whether those leaders start moving counter to the overall market.
  5. The CBOE Volatility or VIX Index – The VIX attempts to measure the expected market movement (in percentage points) of the S&P over a 30-day period. On Aug. 8 2011, the Monday after S&P announced the credit downgrade, the VIX was at 50 percent. Throughout the rest of the month, it fluctuated between the 50% high and a low of -14.54%, indicating extreme levels of market volatility.
  6. Other Indicators – In addition to the VIX, the consumer sentiment index and retail sale numbers may also impact your short-term strategy. For more information about these indicators, take a look at an article we published earlier this year, The Indicators That Might Matter More Than the Debt Ceiling.

What market indicators do you monitor during periods of high volatility?

Brian Bachelier has been with Scottrade for more than 15 years and is currently managing the trader client experience. As a trader himself, Brian continually looks for ways to improve Scottrade’s active trading resources and help offer our clients a competitive edge in the market.

The information and content provided is for informational and/or educational purposes only and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.


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