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What's the Post-Debt-Deal Trade?

The markets were weak at the outset Tuesday on a poor showing in Europe and very poor consumer spending. Slower global growth is clearly the big issue facing stocks.

What's Next?
What's Next?

But there was something else going on today—the markets started seriously tanking right after the Senate approved the debt extension bill.

Traders I talked with noted that there was a new wrinkle: stimulus was going to be tougher to come by. The government—including the Fed—is less likely to ride to the defense of stocks and commodities.

It's not that I'm not anticipating Congress and the president to come up with stimulus ideas; it's that any attempt at significant stimulus will be met with fierce resistance from fiscal conservatives... and now, from the ratings agencies.

After the close, Moody's affirmed the U.S. government's triple-A rating but assigned a negative outlook... it specifically warned against stimulus: "Moody's baseline scenario assumes that fiscal discipline is maintained in 2012, despite pressures for fiscal relaxation that often precede general elections..."

This is good news for the country in the long term, but it is not good news for the economy or the stock market in the short term.

What about trading Wednesday? We are heavily oversold (only 8 percent of stocks are above their 10 day moving average, truly awful) but it's not clear if stocks are washed out yet.

What about ADP and ISM Services, due out Wednesday? I think they matter. Expectations for nonfarm payrolls is so low that the risk is to the UPSIDE, not downside... a couple positive numbers could shift momentum, at least short term.

Trades that seem to make sense:

1) Short dollar, and continue to bet on low rates:

-Jason Trennert at Strategas has noted that 60 percent of the U.S. debt is coming due in the next 3 years at an average yield of 2.4 percent. The U.S. government cannot let rates rise... they cannot afford to pay higher interest rates. Moody's specifically addressed this issue in its release today: "a rise in borrowing costs above and beyond what is now expected would threaten efforts at fiscal consolidation."

2) Dividend paying stocks:

-With stock prices challenged, companies that can raise dividends will be in demand.

3) Gold:

-Despite the high price, as a hedge against volatility.

4) High-grade corporate bonds:

-Investors will be looking for yield.

5) Lesser conviction: long volatility. This seems obvious, but this trade has been a money loser for a long time. We can go nowhere, or drift downward, on light volume and low volatility.

6) Lesser-conviction: the obvious move to more defensive names—consumer staples, telecom, utilities (but not healthcare until the spending cuts are clarified).

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