S&P 500 at 1800 by the New Year!

This will be a very brief commentary as recent events have taken control of the markets at the expense of the macro issues I've identified in past commentaries and I'm not going to rehash those issues once more.

Stocks ended a rather volatile week, captive to every phrase and news event emanating out of Washington, with the Dow down 1.22%, the S&P trading essentially flat, while the Nasdaq, Russell 2000 and the broader market gaining on the week.  Directly below is a daily chart of the Wilshire 5000 which is the entire US stock market:

(click on chart for larger image)

Equities are showing amazing resilience in the face of a potentially disastrous credit event!

And here's the Russell 2000 small cap index which actually made another all time new high in the midst of all the "noise" emanating from inside the beltway:

(click on chart for larger image)

Stocks are clearly indicating that the showdown over the debt ceiling will be a non event and with the Fed's decision not to taper asset purchases earlier in the month, Bernanke and company essentially "has the market's back".

Analysis

In my opinion, the biggest news event of the week was one that seemed to get buried in the midst of all verbiage that Republicans and Democrats spewed over the past five trading days.  

On Thursday, October 3rd, John Boehner, Speaker of the House, announced that he would not allow a US debt default.  So, you say,"what's new?; what else would he say?"  Well, the details in the news alert are what intrigued me.  Boehner supposedly related to colleagues that he would be willing to pass a measure through a combination of Republican and Democratic votes to raise the debt ceiling by violating the so called "Hastert Rule" which refers to an informal policy of not bringing to the floor any measure which is not supported by the majority of Republicans in the House.  Such a move would effectively bypass the relatively small Republican contingent that is currently blocking (with the help of intransigent Democrats) any movement on the present issues surrounding the government shutdown and debt ceiling.  There are enough votes among Democrats and moderate Republicans to therefore raise the debt ceiling.

If I'm right and Boehner moves forward with this initiative then the crisis will dissolve.  Now, he may not be the Speaker very long after he does this but if I'm right, he will do this in order to avoid a panic in the market and irreversible damage to the Republican Party.  And I think the markets are already discounting this from Friday's price action.  

Certainly, most market pundits already believe there will be a last minute settlement anyway.

The bottom line, the price action in small caps and the general market, along with the Fed's willingness to "float all boats" suggests we will rally into year end and I personally see the S&P 500 reaching or exceeding the 1800 level by the New Year.  The 1800 level itself might be a psychological wall that might prevent further upside within this time frame. 

Again, none of the long term issues I've identified here, here and here have changed but I must say that my liquidity trap thesis which I've always identified as a minority scenario is becoming more of a minority scenario with each passing day (thank God!).  I'll be expanding on why this is in subsequent commentaries.

Thanks and have a great week!