Daily State Of The Markets: What's Wrong With This Picture?

Includes: DIA, SPY
by: David Moenning

Good Morning. Rarely is identifying the market's driving force so easy. Usually, right about the time you figure out why stocks are doing whatever it is they are doing, the game has a tendency to change. And it is for this reason that I write my oftentimes meandering morning market missive - to make darn sure that I understand what is moving stock prices on a daily basis. And in case you've been out shopping for the past month, the game right now remains all about the fiscal cliff.

To summarize briefly, this isn't about who wins the debate. It's not about how "balanced" the budget plan is or how "fair" the cuts are. In short, the market doesn't give a hoot about any of that. No, this is about making sure that the economy doesn't get run off a cliff by a bunch of politicians.

As I've been writing lately, all stocks care about right now is that a deal gets done in the very near future. Up until last night I was under the impression that we were simply seeing a great deal of posturing from the two sides and that a deal was likely to get done. However, as of this morning it appears that things have gotten a lot more serious as an effort by Boehner to display Republican unity failed miserably and as such the next step in the process remains unclear.

The fear is that the conservatives in the Republican party won't budge on their pledge not to increase taxes on anyone. If this is the case, then it doesn't matter what gets put on the table by the President or Speaker Boehner because the Democrats believe they have a mandate to raise taxes. And it is a safe bet that the President isn't going to back away from his pride and joy. As such, it appears that we might be back at square one and the risk of the economy going over the cliff has increased.

But I guess the good news is that the fiscal cliff clock still has a few ticks left on it. And now that the game in Washington has moved beyond the basic negotiation phase where both sides talk a good game about wanting to get a deal done, we will see if the gang the American people elected can do what is best for the country. This is definitely going to be interesting.

But for the moment, let's assume that the powers-that-be can and will come up with some sort of plan to avoid pushing the U.S. economy directly into recession. And since we won't know the answer for a while and my 2012 desk calendar is rapidly running out of pages, the logical question to be asking at this time of year is what comes next (after the cliff, that is)?

What's Next (After The Cliff)?

Although I am indeed starting to hear some upbeat views of the coming year, there are still an awful lot of folks spewing doom and gloom. For example, just yesterday the Roubini group suggested that just because Europe didn't implode in 2012 does not mean it isn't going to in the future. (As a quick aside, I personally believe the exact opposite to be true for I'm of the mind that if the eurozone didn't crumble this year, it ain't gonna.)

Then there are all of the global macro guys yammering on about slowing growth, China, the potential for inflation, etc., etc.

While I am not in the business of making forecasts, I am still not buying the idea that the sky is going to fall in 2013. Sure, it's possible. But as I've written recently, isn't this the same song that was being sung at this time a year ago?

Take a look at the graph below. Although this is a picture of the S&P 500 Index, plotted weekly from March 2009 through yesterday, pretend you don't know what it is. Now I ask you, what is wrong with this picture? Even if stocks take a dive today on the cliff news, isn't this the very definition of a bull market? Don't you want to be on that train?

S&P 500 - Weekly
March 2009 - December 20, 2012

Click to enlarge
(Click to enlarge)

And yet, for the vast majority of the time illustrated in this graph, the gurus - who didn't see 2008 coming, by the way - have been telling us to be afraid, very afraid. But wait, isn't the black line on the chart moving in an upwardly sloping fashion from left to right? And isn't the move from 667 to 1444 a good thing?

But then again, I'm NOT one of those deep thinking types. I don't have a fancy degree from an Ivy league business school entitling me to peer into my crystal ball and predict the future. No, as I've mentioned a time or twenty in this space, I don't like to tell the market what it "should" be doing. In fact, I prefer to do the exact opposite and simply try to stay on the right side of the market's big moves.

An Abject Failure In The Media

Yes, my approach can be boring at times and we DO make our share of mistakes. And no I am not likely to make headlines with the strategy I employ. For my answer to any and all questions if interviewed about what the market is going to do next would always be the same. "No Maria, I can't predict the future. Instead I depend on my models to keep me in tune with what the market IS doing right now."

Frankly, I understand why my approach doesn't make me a suitable media star. I don't give a hoot where Apple (NASDAQ:AAPL) is going. I yawn at the mention of Research In Motion (RIMM), JCPenny (NYSE:JCP), Herbalife (NYSE:HLF) and/or whatever else was hot yesterday. And I could really care less about the latest merger between IntercontinentalExchange (NYSE:ICE) and NYSE Euronext (NYSE:NYX). Again, my job is to focus on getting the big moves in the market right - not to be distracted by all those shiny objects that the "Fast Money" is always yammering on about.

Please accept my apology if this sounds redundant because I have hit on this topic a time or two in the past. But at this time of year - no, make that especially at this time of year - I believe it is important to understand what you are doing in terms of your investment strategy and why you are doing it.

So, cliff or no cliff, my approach is going to be the same as I will try to capture the majority of the big moves in the market and then do my darndest to stay out of trouble in between.

Publishing Note: With the holidays upon us and the market basically waiting on a resolution of the fiscal cliff, I'll be taking some time off from the morning routine between now and New Year's. Thus, Daily State will be published on an as needed basis through January 4th.

Finally, at this time I'd like to wish everyone a joyous holiday season and a safe, healthy, and prosperous New Year!

Turning to this morning ... The failure of Plan B to even come to a vote in the House has led to a fairly substantial dive in the U.S. stock futures. The good news is the rest of the world's markets aren't freaking out (Europe and Asia were down, but only modestly) and the futures are well off of their lows. However, Boehner's office has scheduled a press conference for 10:00 am, so the outcome of today's session isn't set in stone as it could be a lot better - or a lot worse. Stay tuned.

On the Economic front ... We'll get reports on Durable Goods, Personal Income and Consumption, and UofM Consumer Confidence this morning.
Thought for the day ... If you can't explain it simply, you don't understand it well enough. - Albert Einstein
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -0.71%
- Hong Kong: -0.68%
- Japan: -0.99%
- France: -0.21%
- Germany: -0.46%
- Italy: -0.62%
- Spain: -0.14%
- London: -0.53%
Crude Oil Futures: -$0.99 to $89.14
Gold: +$3.10 to $1649.00
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 1.773%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -15.54
- Dow Jones Industrial Average: -142
- NASDAQ Composite: -32.85
Positions in stocks mentioned: none