Let Markets Tell You The Fate Of The Budget Impasse And Even The 'Taper'

Includes: IHI, TLT
by: Gary Jakacky

Seeking Alpha readers know that I follow market signals, from the actions of millions of investors who put their money where their mouths are, rather than drivel from politicians on Capitol Hill. Right now the markets could be sending us very valuable information about trends in tax, fiscal, monetary, and budgetary policy. How?

It is uncertainty about everything from Obamacare to FED policy that is preventing businesses from making long term hiring, investment, and expansion plans. I can assure you if amiable resolution of the budget impasse, the sequester, the shutdown, the debt limit, or all of them, occurs, markets will surge.

But you will be the last to find out. By the time you get that information from the media, it will be too late. Instead, let markets give you a hint. Two in particular bear close watching.

Treasury Bonds: If the above issues are resolved and the Angry Birds in our Halls of Power come to a peaceful agreement with the entitlement Pigs at the federal trough, bonds should sell off sharply. Why?

As the iShares 20+ Treasury Bond Fund ETF (NYSEARCA:TLT) chart shows, prices have been falling for months. Either the economy is getting stronger, markets fear the "taper", or both.

In June, taper talk caused bonds to crash through support at $110 (see chart below). But the fear of a taper was removed by the FED Statement a few weeks ago. Yet bonds haven't rallied to their previous price levels.

Why? Because the economy continues its sputtering recovery. Remove budget uncertainty and the economy will soar. Think of what it would mean to our stock market if the sputtering recovery were to catch a second breath (or breadth!).

If bonds fall toward recent price lows of $102, and especially if they break downside, it will be signaling that a favorable resolution of the budget impasse has been reached. Watch iShares 20+ Treasury Bond fund like a hawk.

I might add that a strengthening economy would bring back "taper" talk, as well!

(Click to enlarge)

source: freestockcharts.com

Medical Devices: If there is any consensus about Obamacare at all, any common ground amongst liberals/conservatives and Democrats/Republicans, it is the tax on medical devices should be delayed or repealed. Over the last few days the iShares Dow Jones Medical Devices Fund (NYSEARCA:IHI) has jumped and ebbed as the fate of the device tax has attracted support from rank and file but been rebuffed by congressional leadership. If the "Congressional Resistance Line" in the chart below breaks upside, it is full speed ahead for this sector, and probably the market as a whole.

(Click to enlarge)

source: freestockcharts.com

While reading price signals can be like reading tea leaves, don't forget that these markets are giving us guidance on very important aspects of fiscal, monetary, and budgetary policy from Washington. These are exactly what should be on the minds of long term investors. We just happen to be at a moment where near term market behavior will shed light on these long term trends.

Disclosure: I am long IHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.