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Moving on from the debt ceiling…

Now that the debt ceiling debate appears to be settled, investors may want to take more risks. That’s a good thing for smaller stocks, like the stocks we buy for our portfolio. Below I take a closer look at what’s happening in the S&P 500 (SPY) this week and how it affects our next move. Read on for more….

(Enjoy this updated version of my weekly commentary originally published June 1st in the POWR Shares Under $10 Newsletter).

The debt ceiling agreement has passed the House of Representatives and is also expected to be passed by the Senate. That was marginally good for equities, with the S&P 500 (SPY) up about 3% over the past week.

There are still plenty of concerns about the economy, but it looks like the debt ceiling won’t be one of them.

It’s not really a surprise that the US avoided bankruptcy (the consequences of which could have been catastrophic).

The real surprise is that it didn’t get to the very last minute for Washington to get a deal done. Attention will now shift back to the Fed and the fight against inflation.

You can see in the chart above that the SPX (S&P 500 index) is near the top end of its two standard deviation range.

That doesn’t necessarily mean it will pull back, but an average pullback is really a stock thing, so there could be some selling pressure in the near future – albeit short-lived, most likely.

With the debt ceiling issues largely resolved, tomorrow’s jobs report will be the focus for many investors.

The labor market remains strong, which is both good and bad. It’s good because people have jobs (obviously). It’s bad because it’s becoming more likely that the Fed will continue to raise rates to fight inflation.

However, the Fed appears to be in no rush to raise rates at this stage. There is currently an 80% chance of a rate hike at the June FOMC meeting (according to the futures market).

However, there is more than a 50% chance that the Fed will raise the rate at the July meeting.

The Fed is trying to achieve a soft landing. That is, they want to fight inflation (send it lower) without torpedoing the economy.

I’m not sure if it’s possible, although it worked in the past. We’ll have to wait and see if they can capture that magic this time around.

Volatility, as seen in the VIX chart below, wavered during the final days of the debt ceiling debate.

However, you can see where the VIX is now approaching 15. Under 15 is generally considered a low volatility regime for the market.

It is not uncommon for market volatility to subside as the summer holiday months approach.

Things are a little different this year, however, with at least one rate hike expected in the summer period.

While the Fed did a fair job of telegraphing their moves, further rate hikes in the coming weeks could add some volatility to stocks.

Ultimately, we may be approaching a period where investors are willing to take more risks with equities.

Lower volatility typically means investors are taking more risk on small stocks and security names. That certainly means good things for us, and that’s the area we’re mostly in.

What to do now?

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What gives these stocks the right material to become big winners even in this challenging stock market?

First, because they are all low-priced companies with the most upside potential in today’s volatile markets.

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All the best!

Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10

SPY shares closed Friday at $427.92, up $6.10 (+1.45%). Year-to-date, SPY has gained 12.32% versus a percentage increase of the benchmark S&P 500 index over the same period.

About the author: Jay Soloff

Jay is the lead Options Portfolio Manager at Investors Alley. He is the editor of Options Floor Trader PRO, an investment advisory firm that provides you with professional options trading strategies. Jay was formerly a professional options maker on the floor of the CBOE and has been trading options for over two decades.


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