To Cliff or Not to Cliff

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It doesn’t really matter what our station in life, most of us procrastinate. It appears Congressman and Senators share that trait with the rest of us. Congress begins their holiday vacation at the end of the week. School kids and power brokers are the only ones that get a big break for the holidays. The start of recess is important because it often gives us guidance on what is happening with major issues in DC. Whether it be the tax holiday, or Bush tax cuts or any other major issue that has confronted our leaders, the middle of the month is a good starting point to use in determining a time table for progress.

Last week the fiscal cliff talks were the main topic of debate in the markets. Any perceived progress on the issue led to a spike in the markets. If there was commentary that was perceived as negative the markets would quickly sell off. The end of this week marks the beginning of vacation for the movers and shakers in DC. Historically whenever there has been a major issue that Congress has to iron out, by the end of the year it has been taken care of, on average, 16 days prior to December 31. Just by chance when, on average, vacation starts for our nations power brokers. I suspect we’ll see a late night grand announcement sometime over the weekend.

November nonfarm payroll data was released last Friday. The number of additions, 146,000, was well ahead of expectations. The number was even stronger when you consider the impact of Hurricane Sandy. But, Michigan Sentiment came in below expectations. So, as with most things these days there was a good bit of both the positive and negative in recent economic releases. Monday the November ISM was released and it was slightly below expectations.

While the markets were relatively flat last week the Leading Economic Indicators, on balance, moved higher. The market component of LEIs was the area of strength last week. Commodities and global equities rose more than 1%. Markets outside of the U.S. continue to outperform our market. Sentiment data came in mixed. As mentioned above the Michigan sentiment number came in below expectations. 

Technically the market remains extremely split. Things have improved considerably over the past few weeks. 55% of the stocks in the S&P 500 are in either basing or advancing patterns. 54% of stocks in the secondary markets are in good shape technically. Many of the names that are sound technically are stacking up nice returns. Several names remain in their own private bear markets.

The aggressive move lower in the markets in the 6 days of trading after the election appears to be a false breakdown. While we are not out of the woods yet the intermediate term low of November 16th appears to be a low that will not be violated in the near term.

The major averages have all moved back above their respective 200 day moving averages. The move in the markets has advanced to the critical 50 day moving averages. All major indexes, except the NASDAQ are, as I write, trading above their 50 day moving averages. Keep an eye on those levels. As we get to the nitty gritty on the fiscal cliff issues the 50 day moving averages will give you a clear indication how the fiscal cliff negotiations are winding down.

For a sign that the market likes what they hear from Washington here are the key resistance levels for the major averages: S&P 500 1425/Dow 13,170/NASDAQ 3032/Russell 2000 828. Support levels for the major averages are 1395/12,900/2955/815.

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About Thomas J Smith CFA