Most people expected the stock market to go down last week due to debt ceiling concerns, but instead it went up. Why? 2 reasons: passage of a 2nd bailout package for Greece & Corp earnings continue to exceed expectations. People have a hard time grasping that although the U.S. economy is sluggish, U.S. corporations are doing remarkably well.
However, this week will be all about the debt ceiling and it will likely come down to the wire. In all likelihood a deal will get done and default will be averted. The question is, will it be a small, short-term deal which will disappoint investors and likely lead to a downgrade of the US credit rating or will it be a big ($4 trillion) deal that everyone wants.
The bigger question is how to prepare your portfolio for either eventuality. Unfortunately, any market timing moves or asset allocation changes have just as much chance of hurting you as helping you. The market is prepared to jump as soon a significant deal is announced and the safe money vehicles are (and have been for a while) tremendously overvalued. So, the right move for now is to sit tight (in your well diversified portfolio) and keep the focus for your long term money on the long term, not the next few weeks. We are also looking to capitalize on any disconnect in valuation (based on panic) should one present itself in the short term.