Via Michael Naso of FBN securities,
The economic calendar remains light until Wednesday’s Retail Sales data while most S&P 500 companies already have reported QE3 earnings. This keeps the spotlight shining on the fiscal cliff despite an expiration sitting over six weeks into the future. Unfortunately, this will supply a stiff headwind to stocks as it only reminds investors of the peril which looms directly in front of them.
One suggestion I could offer both sides of this debate to avoid any further damage is just to be quiet. Stop making stump speeches. We all know your views. We all know how stridently you will defend them, but your incessant reminders that you have dug in your heels does no good regardless of the negotiating tactic. Instead, hold a joint press conference and admit there are ideological differences, but announce that both parties will do their best to hammer out a deal palatable enough for everyone.
Alas, this is wishful thinking. As a result, anytime they open of their mouths, most notably Mr. Obama’s, the words they spew will cause damage to share prices. After George W. Bush’s popularity soared after 9/11, traders bought ahead of every one of his speeches, especially pertaining to the economy, to catch an easy, yet significant, move higher. Unfortunately, the President’s drawing a line in the sand on Friday has guaranteed that a countless number of E-Mini bandits will short the futures in front of his speaking which will erode the conviction among managers trying to put money to work who otherwise would buy these dips. Ironically, it may take an equity market in free fall that ultimately forces compromise, for if stocks finish the year on their highs, then, the bullish environment would give both Speaker Boehner and Mr. Obama ample cover to go beyond the stated deadline. The eroding of Main Street’s 401K assets would therefore force everyone to sit down and bargain in good faith.
I wrote on Friday that the current pullback has come close to entering the Exhaustion Stage. Primarily, the average monthly NYSE Closing TICK must drop below +60 before I feel comfortable that an intermediate term bottom has arrived. The outperformance by the S&P 500 over the Russell 2000 for most of the session along with open interest figures that declined massively hinted at a modest short covering bounce. To flip my most reliable technical indicator to a buy will entail further long selling similar to the magnitude we witnessed on Wednesday and Thursday. Consequently, I maintain my 1355-1360 target for the index despite the futures’ already plummeting to an overnight fair value basis low of 1367 late last week.
The University of Michigan Confidence figures printed its highest level in over five years; however, I would throw out the print as part of one’s macro analysis, for it comes too close to the Election. A better guide to consumer sentiment in response to the more rancorous bickering over the fiscal cliff should arrive later in the month. Thursday’s Empire and Philly Fed surveys should gauge the temperature of manufacturers with consideration to Hurricane Sandy and the current political climate. I anticipate an unraveling of these subjective releases in the coming weeks along with the weakening of the objective data next month. Although I expect a modest relief bounce in equities to commence in the next several days, the subsequent reversal will be small in magnitude and short in duration, for as much attention the fiscal cliff has garnered in the past several days, its shadow will lengthen dramatically as we make that final turn for home for 2012.