Daily State Of The Markets: Trying To Put The Cliff In Perspective

Includes: DIA, EZU, SPY
by: David Moenning

Good Morning. As long-time readers know, my oftentimes meandering morning market missive is about trying to identify the forces responsible for driving traders to do what they do each day. As I've said a time or twenty, if you can first identify "the what" and then understand "the why" of the stock market action at any given time, you have a decent shot of staying in tune with the really important moves. And as any experienced investor will tell you, it is during the big moves that all the money is made.

So for today, my job is easy as traders, investors, analysts, and everyone in between continues to focus nearly all of their time and energy on the state of the fiscal cliff. Yes, I know, it really isn't a cliff as the economy isn't going to grind to a halt come January 1 if a deal isn't reached. It's not like back in 2008 when the worry was that there would be bank runs and money market funds would "break the buck." No, life is likely to go on come New Year's Day - assuming we can get through 12/21, that is.

However, as we learned with the European debt crisis, which at times seemed as if it would never, ever end, the market eventually learns to deal with whatever "big, bad event" is in front of it. Think about this for a moment. For all of the doomsday scenarios that were laid out for us at this time last year, and all the euro summits and Greek deadlines that came and went, the S&P 500 is really none the worse for wear. Heck, even after yesterday's sloppy session the index is up nearly 13% on the year. So, while Europe is indeed in recession and the debt crisis isn't exactly solved, stocks found a way to advance.

While I'm likely to receive some objections on my view, I'm of the mind that even during a crisis, the stock market eventually looks forward. Well, once traders figure out that the sky really isn't going to fall this time, anyway. And since the eurozone is still together and its citizens are still buying food and living life, even the EZU (the ETF mirroring the EU) is up on the year.

I would also like to suggest that the current U.S. budget negotiations are not even in the same ballpark as the European debt mess. Thus, I'm going to opine that any difficulty stocks might encounter in the event that Congress and the White House can't reach a deal before the end of the year might present a buying opportunity.

This is not to say that the algo-induced dive that would accompany word that a deal was not reached wouldn't be ugly. It would. And there's no telling how far down traders might take the S&P during the temper tantrum that would undoubtedly ensue. S&P 1400 would likely be hit within minutes of such an announcement and any other near-term support would be simply ignored by the computers. And since we've seen this type of action before, I'm guessing that 1350 might be a reasonable target.

But the key point is that unless the two sides just decide to do nothing for the next four years, the downside risk in the stock market is likely limited to 5% or so. Sure, sentiment could turn downright ugly in a hurry if the news is uber-bad. But again, any recession caused by the cliff is likely to be both technical and temporary. And my guess is that after all the hysterics are out of the way, the stock market will eventually figure this out.

Let's keep in mind that when the market is not fixated on a "big, bad event" it tends to look forward to the tune of six to nine months. And if we look at the economic projections being put out there, the folks I respect suggest that the economy should be recovering nicely by that time. Thus, it follows that unless there is a new "big, bad event," the stock market might be a good place to be next year and that a buy-the-dip strategy might just be effective.

Please don't misunderstand. I am not suggesting that everything is going to be hunky dory for the next six months. I am merely stating that unless our leaders in Washington turn out to be complete boneheads, stocks ought to be able to, in time, get past this whole fiscal cliff "thing." But that doesn't mean that there won't be some ugliness along the way. After all, the algos are still running the show on a day-to-day basis.

Turning to this morning ... While a late afternoon meeting in the oval office between Speaker Boehner and President Obama was said to be "frank" there was no progress reported. However, improving economic data in China as well as better than expected Preliminary PMI's in the eurozone is keeping U.S. futures above breakeven in the early going.

On the Economic front ... We'll get reports on CPI, Industrial Production and Capacity Utilization this morning .
Thought for the day ... Just for fun, try smiling at everyone you meet today...
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: +4.32%
- Hong Kong: +0.71%
- Japan: -0.05%
- France: -0.06%
- Germany: +0.26%
- Italy: +0.31%
- Spain: +0.19%
- London: -0.09%
Crude Oil Futures: +$0.84 to $86.73
Gold: +$0.70 to $1697.50
Dollar: lower against the yen and pound, unchanged vs. euro
10-Year Bond Yield: Currently trading at 1.732%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.30
- Dow Jones Industrial Average: +24
- NASDAQ Composite: -3.31
Positions in stocks mentioned: none