Bears panicked Wednesday following a series of news reports that a deal is likely to avert a default on US debt, states Jon Markman, editor of Strategic Advantage.

The Nasdaq 100 climbed to 13,589, a gain of 1.2%. The rally brings the benchmark index within 1.2% of the August 2022 highs, an important overhead resistance level.

I wrote in March that bears were likely to concede a rally to that level based on underlying strength in the shares of big capitalization technology firms like Apple (AAPL), Microsoft (MSFT), Meta Platforms (META), and Nvidia (NVDA). One of the central points of the bearish narrative is that too few stocks in 2023 account for the bulk of gains for the NDX.

Historically, this is not a great argument. Lagging stocks usually follow leadership issues, often due to impatience by bears. Runaway short positions elicit panic buying to reduce exposure. Shares of Datadog (DDOG), a heavily shorted data analytics firm, have raced from $63 on May third to $91.28 through the close on Wednesday.

Unfortunately for bears, more of these horrors are likely as bulls begin the process of squeezing short positions. The pace of short covering could become frenetic Thursday if Washington politicos announce a deal on raising the debt ceiling.

The first support level for the NDX is now 13230, the rising 20-day moving average. Buy every meaningful dip in advance of a rally that tests major resistance at 13,750.

The NDX Loop: Members bought the ProShares Ultra QQQ (QLD) on May 2 at $48.20. The 2X leveraged index fund closed Tuesday at $52.23, up 8.4% from the entry-level.

Set up to sell half of the new position at the new $53.30 LMT GTC, and half at $58.20 LMT GTC. Set a trailing stop loss at the new $47.19 STP

Behind The Headlines: The Dow gained 1.2% to 33,420.8. Financials, energy, and consumer discretionary led the gainers among sectors with each up more than 2%. Only utilities and consumer staples posted losses.

Breadth favored advancers three-one. There were 215 new lows vs 168 new highs. President Joe Biden said Wednesday that debt-ceiling negotiations will continue with congressional leaders in the coming days until a deal is reached. "The nation has never defaulted on its debt, and it never will," Biden said, according to a statement released by the White House. In the absence of a deal, the country might default as early as June first.

Jefferies said it is starting to "feel confident that a deal is going to be announced in relatively short order." The firm sees the possibility of an announcement of a framework as soon as Sunday when Biden returns from his trip to Japan for the G-7 meetings.

In economic news, housing starts in the US increased 2.2% to a seasonally adjusted annual rate of 1.40 million units in April from a downwardly revised 1.37 million reading the prior month, the Census Bureau and the Department of Housing and Urban Development said. The consensus on Econoday was for a 1.41 million print. Bloomberg

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