The sky can never be the limit for the market, though it sometimes seems that way. The limit for the debt ceiling could prove to be a different matter for some; the resolution of which will either take the market higher or send it crashing.

Freepik

Yesterday the markets were mixed, but generally did not move from their major thrust upwards on Friday. At the close on Monday, the S&P 500 stood at 4,138, up 2 points, the Dow closed at 33,619, down 56 points, and the Nasdaq Composite closed at 12,257, up 22 points. A look at the 3 month chart shows that the major indices are at Y-t-D highs.

Chart: The New York Times

Top gainers were in Consumer Discretionary - (Travel and Leisure), Pharma and Tech. Carnival Cruise Lines (CCL) came in first, followed by Viatris (VTRS) and Advanced Micro Devices (AMD).

Chart: The New York Times

Currently in the run-up to the market open, S&P 500 market futures are trading down 14 points, Dow market futures are trading down 16 points, and Nasdaq 100 market futures are trading down 54 points.

TalkMarkets contributor Marc Chandler notes that Monday's was a Consolidative Session Marked By Weak Chinese Imports And White House Debt Ceiling Talks.

"Market sentiment remains fragile. Equities are mostly lower. Japan was a notable exception, and concerns about China's economy after a sharp decline in imports took mainland and Hong Kong listed companies sharply lower. Europe's Stoxx 600 is giving back yesterday's 0.35% gain plus more. Bank shares are off 0.65% after rallying 4.20% over the past two sessions. US equity futures are heavier. Benchmark 10-year yields are mostly a couple of basis points softer in Europe, but the 10-year Gilt yields are a little higher. The 10-year US Treasury yield is about three basis points lower to 3.47%, and the two-year yield is back below 4%."

Freepik

"The dollar recovered in the North American session yesterday and is mostly firmer today. Yet, given its recent losses, today's upticks look more consolidative than a reversal. The focus is on the debt ceiling, where a meeting of Congressional leaders and President Biden takes place today at the White House. Bank shares also remain in focus. Tomorrow the US reports April CPI figures. The greenback is also enjoying a firmer bias against most emerging market currencies today...

Fed Chair Powell indicated at last week's press conference that the Senior Loan Officer Opinion Survey (SLOOS) would be consistent with the previous survey that showed weaker loan demand and tighter lending conditions. True that. The Fed's tighter monetary policy was already having the desired effect before the flare-up of banking stress. The percentage of banks reporting tighter lending standards for medium and large businesses increased marginally, to 46% from 44.8% in Q4 22. To be sure, it is not just supply. Demand for loans is also waning...

The US economy continues to be resilient to the headwinds, and the Atlanta Fed's GDP tracker sees Q2 growth at 2.7%. From their model, the increase in employment will boost consumption while the sharp decline in wholesale trade (-2.1% rather than 0.4% that the median in Bloomberg's projected) translates into weaker private investment growth. The two practically offset each other, leaving the Atlanta Fed's tracker virtually unchanged since May 4."

Contributor Bob Lang suggests Two Ways To Protect Your Portfolio Against A Stock Market Crash.

"1) Covered calls

Let’s say you have owned 500 shares of Apple for some time, and you are worried about wobbly market conditions. After a strong run by Apple, the stock could dip with the rest of the market. A drop of 10 points in the stock means a $5,000 loss if you don’t sell the shares. You don’t want to sell, so you use covered calls to protect your portfolio instead.

Your Apple stock is worth $160 per share. By selling five calls against your stock that are well above the current price, you can pull in some nice cash. Perhaps in three to four months, you could sell the 175 calls against your stock and cash in the premium. If Apple never gets to $175, you pocket the premium when the option contract expires.

Of course, this not a strategy without risk. If Apple rises up past the 175 strike, your stock can be called away. You would still have gains from today’s price of 160 up to the strike price, and you keep the premium of the option. You would not participate in gains above that strike price, but that’s OK. (Further, if your stock is called away it could create a tax liability situation.)

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2) Index puts

A second strategy for protection against volatile periods is to simply buy index put options. Put options rise in value when stocks or the market go down.

I use this strategy frequently during bear market periods, fewer times during bull markets...

My go-to index puts are SPY, DIA, QQQ, and IWM. I generally advise traders to have 3-5% of your portfolio invested in index puts. Though it will drag down your total return, it’ll greatly reduce the overall volatility of your portfolio. Having some put options working, especially when they are cheap, will give you peace of mind that your portfolio can handle big swings."

Contributor Manuel García Gojon (Mises Institute), writes The Fed Is Overindebted, Isn’t It?

Gojon gives an overview of the current "debt crisis" from an accounting point of view and suggests some remedies, a few of which are far from likely to be taken up. The point that you can't clean up excess QE through QT, and vice versa is something that is understood by most. It doesn't mean that the Fed is ill disposed to trying either remedy or both. That said, Gojon's article is quite the opinion piece. Below is an excerpt from his conclusion.

"Such a “cooking the books” could indeed “save” the Fed’s balance sheet, it doesn’t mean investors wouldn’t become concerned and have doubts about the whole US dollar construct. If the Fed has already run out of equity, what must the situation be like in the commercial banking sector? Also, if its balance sheet is already overstretched, will the Fed still be in a position to function as a “lender of last resort” in the next crisis?

The Fed’s balance sheet, in which liabilities exceed assets, is a red flag. Investors could lose confidence in the reliability and value of the US dollar and all currencies based on it. Who could blame investors if that eventually happened? In fact, the Fed’s negative equity is just another sign of the growing trouble in the world’s fiat money regime dominated by the US dollar."

Economist and TM contributor Scott Sumner seems to shine more light on the state of things (though, not directly debt-focused) asking What Current Macro Puzzle?

"Here’s Tyler Cowen:

One of the current macro puzzles is that we keep on receiving good labor market reports during a time of monetary and credit tightening. Which is the missing “dark matter” variable that helps to explain this?

I see no “current macro puzzle” because I see no monetary tightening. NGDP growth over the past couple of years has been very rapid, and thus the strong labor market is no surprise. Perhaps Tyler would say that the strong NGDP growth is surprising. If so, why? Is he assuming that rising interest rates reflect monetary tightening? (It doesn’t.) Does he judge monetary policy by the growth rate of M2? (He shouldn’t.) What’s his metric? What causes Tyler to conclude that monetary tightening has been significant?

I am aware that the extremely rapid NGDP growth has been gradually slowing—but it’s still quite rapid. If you wish to call that “tightening,” that’s fine. But the strong labor market is no surprise given the high NGDP growth rate. I don’t see any mystery here. David Beckworth produced this graph:

Again, what macro puzzle? If Tyler insists on finding some mysterious “dark matter,” how about the following:

The unobservable natural rate of interest has risen faster than the policy rate, producing easy money. The cause of the rise in the natural rate is the monetary and fiscal stimulus of 2020-21, which generated very fast NGDP growth. Higher NGDP growth leads to a higher natural rate of interest in 2022.

If you insist on focusing on M2, then the dark matter is movements in velocity."

In the "Where to Invest Department" contributor Joshua Warner checks on Where Next For Disney Stock Ahead Of Q2 Earnings?

Warner does a thorough analysis so be sure to check the full article, but below are the main points he takes up:

"Disney’s (DIS) theme parks and resorts continue to power ahead while losses from its streaming services have peaked.
 

Key takeaways

• Disney will report under its new organizational structure this quarter
• Strong attendance levels and price rises at theme parks and resorts will drive revenue growth higher
• Earnings to fall for the third consecutive quarter thanks to rising costs, streaming losses, and lower profitability from its TV networks
• Markets believe this will be the trough and that profits will return to growth in the third quarter
• Streaming losses to narrow, fueling hopes they have peaked
• Disney+, ESPN+, and Hulu should all see subscriber numbers rise following some tough quarters
• Disney stock could find it more difficult to move above recent peaks without a catalyst"

Pixabay

That's a wrap for today.

Have a good one!

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