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Washington is playing a game of chicken on the debt ceiling right now. It has already damaged the financial markets and confidence in the U.S. economy. Although it makes sense to prepare for the worst case scenario, chances are that Washington will not want to drive an already weak economy over the cliff.

That's why the most likely outcome is for some sort of agreement to be reached either very late this week or over the weekend. The pressure for a deal to be made by this weekend in advance of the Monday morning stock market opening will be enormous. If Washington announces that a crisis has been averted by reaching a debt agreement this weekend, the markets would likely see a huge rally on Monday, as shorts rush to cover and investors snap up some badly beaten stock bargains.

With many stocks looking cheap and earnings for the quarter looking solid, resolution of this potential crisis could get investors back in the game and we could see a rebound in the Dow index of about 400 points. The stocks below have been punished recently and are economically and market sensitive, while others are highly shorted and could see a short covering rally. Here are a number of stocks that could spike up significantly if we see a 400 point rally when the debt limit issue is resolved, probably by next week:

American Axle (NYSE:AXL) shares are trading around $10.68. AXL is a leading manufacturer of automotive components. The 50 day moving average is about $10.94 and the 200 day moving average is about $12.03. Earnings estimates for AXL are $1.79 per share in 2011. The P/E ratio is about 5. This stock is cheap, oversold and is likely to spike up on any market rallies to to the high short interest and undervaluation. Management is taking advantage of this lower price as they have been buying shares. You can see the repeated insider buying here.

ATP Oil and Gas Corp. (ATPG) is trading at $14.75. ATPG is an independent oil and gas company, based in Texas. These shares have traded in a range between $8.85 to $21.40 in the last 52 weeks. The 50 day moving average is $16.19 and the 200 day moving average is $16.60. The earnings estimates are for a loss of $1.38 per share in 2011, but analysts see profits of $1.86 per share for 2012. Thanks to a sharp sell off recently, this stock is very cheap.

Brown Shoe Co. (NYSE:BWS) shares are trading around $10.53. Brown Shoe is a leading wholesaler and retailer of shoes, and is based in Missouri. These shares have traded in a range between $8.85 to $15.77 in the last 52 weeks. The 50 day moving average is $10.35 and the 200 day moving average is $12.32. Brown Shoe is estimated to earn about $1.18 per share in 2011, and $1.49 for 2012. BWS insiders have been buying shares and these shares appear to be a bargain for only 6 times 2012 earnings. Another plus is that BWS pays a 28 cent per year dividend, which is equivalent to a 2.6% yield.

Hartford Financial (NYSE:HIG) shares are trading at $23.10. These shares have a relative strength index of about 34 which indicates the shares are oversold. HIG is a leading insurance company. The 50 day moving average is $25.28 and the 200 day moving average is $26.29. Earnings estimates for 2011 have been impacted by storm losses and legal expenses but are expected to rebound to about $4 per share in 2012. HIG pays a dividend of about 40 cents per share, which is equivalent to a yield of about 1.5%. Also, this stock is trading well below book value which is stated at $45.93. A rally in the markets would boost the value of the investment portfolio and boost the stock price.

Ford Motor Co. (NYSE:F) shares are trading at $12.39. These shares have a relative strength index of about 31 which indicates the shares are oversold. The 50 day moving average is about $13.70 and the 200 day moving average is about $15.24, so these shares are trading well below major support levels. Earnings estimates for F are $1.90 per share in 2011 and $1.98 for 2012 which puts the P/E ratio at only 6. These shares are very cheap on a P/E ratio basis and with the recent drop in the stock price, they could be set for solid gains from here.

Bank of America (NYSE:BAC) shares are trading at $9.67. The 50 day moving average is about $10.77 and the 200 day moving average is about $12.50, so these shares are trading below support levels now. Earnings estimates are for a small loss in 2011 and a profit of $1.55 for 2012. This gives BAC shares a P/E ratio of only about 6 times 2012 earnings. The dividend is 4 cents per share per year which is a yield of about .4%. If the U.S. reaches a debt limit agreement, mortgage rates could remain lower and consumer confidence could improve both of which would help the housing market and Bank of America.

Chimera Investment Corporation (NYSE:CIM) is trading around $3.12. Chimera is a real estate investment trust, and is based in New York. These shares have traded in a range between $3.09 to $4.36 in the last 52 weeks. The 50 day moving average is $3.47 and the 200 day moving average is $3.72. CIM is estimated to earn about 60 cents per share in 2011. Insiders have been buying at much higher prices. CIM pays a solid dividend of 52 cents per share which is equivalent to a 15.8% yield. The book value is stated at $3.45. This stock has dropped hard recently over concerns that a default by the U.S. government would raise mortgage interest rates and impact Chimera, but if there is no default this stock should gap up on buying from bargain hunters seeking yield and short covering.

The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. This information is solely educational in nature and not intended to serve as the basis for any investment decision.

Disclosure: I am long CIM, BAC, HIG, ATPG, AXL and I believe all these stocks offer great value and plan to buy all of them this week.

Source: 7 Stocks That Could Spike Up Significantly if We See a 400 Point Rally Next Week