Debt ceiling is a buy-the-rumor-but-sell-the-news event, cautions this strategist

As for Wednesday’s action, some are highlighting the bullish bets that are counting on the White House and lawmakers getting a deal done (read more on 0DTE — zero days to options expiration trading — here):

But investors may need to be light-footed if they want to catch any ride higher on debt-ceiling hopes, says our call of the day from Cameron Dawson, chief investment officer at NewEdge Wealth, a boutique wealth manager. She urges investors to play the debt-ceiling optimism carefully.

“I think that the debt ceiling is the biggest buy-the-rumor-sell-the-news event, because the lead-up to the debt ceiling has actually been a major driver of liquidity being pumped into this market,” she told CNBC in an interview late Wednesday.

“When the Treasury has been spending down its cash balance instead of issuing new bonds, the end result is that it increases reserves in the system and adds liquidity and that’s one of the reasons why growth stocks, technology stocks, speculative stocks have been up year to date,” said the former Bank of America equity analyst.

“But when we get past the debt ceiling, the Treasury will start issuing new bonds and that will have the net effect of taking liquidity out of this market,” removing a tailwind for equities, said Dawson.

Debt ceiling debate: How U.S. government debt and stocks will perform if a resolution is reached, says DataTrek

Her firm has been cautious on stocks, and she’s not shifting there, though that means sticking to quality names, rather than hiding out in cash, she says. “We’ve been staying invested, but it’s saying we don’t think that names that have high leverage or weak cash generation are where we want to be in this environment.”

“So in a tight liquidity environment, in an uncertain environment, you want to stay in those quality names in portfolios in order to ride out the cycle,” said Dawson.

Our last word goes to one bullish voice out there who predicted a move higher for stock at the start of the week.

In his weekly newsletter that published on Monday, Kobessi Letter’s editor-in-chief Adam Kobeissi laid out a bullish technical setup for the S&P 500 that may put sell-in-May theories into question.

“Fundamentally speaking, equity markets have been incredibly resilient despite a plethora of headwinds and we believe this will remain the case into June,” he wrote.

Kobeissi called 4,150 as near-term resistance on the upside — the S&P 500 closed at 4,158.77 on Wednesday — but said 4,200 was the “real long-term pivot point that bulls need to break.”

“The last time the S&P 500 traded above 4,200 was in August 2022 and the 4,200 level has been rejected multiple times since then. It is possible that the near-term consolidation we have seen is building technical energy for a breakout,” he said, adding that they remain bullish that 4,200 will be reached.

Read: ‘Doomsday machine’: Here’s what could happen if the debt ceiling is breached

The markets

U.S. stocks
SPX,
+0.46%

DJIA,
-0.13%

COMP,
+1.04%
are mostly struggling to follow up Wednesday’s rally, with some losses notably after fresh Fed commentary. Oil prices
CL.1,
-0.84%
are down, with gold futures
GC00,
-1.46%
continuing to slip at $1,974.30 an ounce. The yield on the 10-year Treasury 
TMUBMUSD10Y,
3.636%
was up 5 basis points at 3.62%. Asia stocks
NIK,
+1.60%
followed up Wall Street’s Wednesday rally with strong gains of their own.

Read: Japan’s stock market is on a tear. Is it too late to jump in?

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Walmart shares
WMT,
+0.70%
are higher after the retailer beat forecasts and lifted its full-year earnings outlook, while Bath & Body Works
BBWI,
+10.80%
stock is rising on forecast-beating earnings and raised guidance. Alibaba
BABA,
-3.64%
stock is down after the Chinese e-commerce giant posted mixed results. Ross Stores
ROST,
+0.55%
and Applied Materials
AMAT,
+4.21%
are due after the market close.

Read: CEOs and other top execs are saving billions with ‘top hat’ retirement plans, study says

From after-hours earnings news, Cisco stock
CSCO,
+0.13%
is down 3% on worries about declining orders — CFO Scott Herren told MarketWatch that clients are just being “prudent.” Take-Two stock
TTWO,
+11.95%
is up 10% after an outlook hinted the next “Grand Theft Auto” video game is a year or so out. Retailer Boot Barn
BOOT,
-12.41%
shares are down 15% on weak sales.

Netflix
NFLX,
+7.81%
says its ad-supported tier has nearly 5 million monthly active users globally.

Weekly jobless claims fell by 22,000 reversing a rise in the prior week, while the Philly Fed factory index showed a 9th-straight decline in activity. Existing home sales and leading economic indicators are still to come at 10 a.m. Dallas Fed President Lorie Logan said data doesn’t justify a pause on rate hikes just yet. Fed Gov. Philip Jefferson was due to 9:15 a.m. and Fed Vice Chair for Supervision Michael Barr is due on Capitol Hill at 9:30 a.m.

Montana has become the first state to ban TikTok, which calls the new law unconstitutional.

Florida Gov. Ron DeSantis reportedly plans to officially launch his presidential bid next week.

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The chart

Credit Suisse strategists point out that investor bets on S&P 500 decline — via e-mini S&P 500 futures
ES00,
+0.52%
— are at extremes not seen since 2011. Should the index push through big resistance levels, they say these bets could unwind and cause a massive short-covering rally.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

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