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Markets Will Dictate Speed of Fiscal Cliff Resolution.

 November 15, 2012 01:54 PM

Thursday, November 15, 9:45 a.m.

(By Sy Harding) Throughout the crises of the last couple of years politicians around the world have proven beyond doubt that they have little incentive to work on the problems unless markets panic them into doing so.

It was shown in Europe in the way government officials at the EU, IMF, and ECB only scrambled into weekend and overnight meetings and emerged with promises of dramatic programs they promised would solve the crisis when stock markets plunged, or bond markets spiked bond yields to danger levels in specific countries like Greece, Spain, Italy, etc., in the summers of 2010, 2011, and this year.

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And each time as soon as markets were encouraged by the promises and began to rally again, the politicians and officials returned to squabbling and arguing over the details of how and when to actually implement the promised actions – until markets became fearful and plunged again. 

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It was clearly demonstrated in the U.S. when Congress and the Federal Reserve only panicked into talking seriously of the need to act to re-stimulate the economy when the stock market plunged in the summers of 2010, 2011, and this year.

And when the Fed took the whole load on itself with QE2 in 2010, Operation Twist in 2011, and QE3 this year, and the market began rallying again, Congress stuck its head back into the sand and saw no need to do its part on the fiscal side.

And now, with the failure of QE2 and Operation Twist to have any lasting effect, and the hopes for QE3 being factored back out of the market now that it's been announced, and the Fed out of ammunition, the ball is fully in the hands of Congress.

And its first and most serious challenge is to resolve the ‘fiscal cliff', or at least kick it down the road, before year-end.

But while both sides of the aisle profess that this time reaching a compromise is of utmost importance and at the tops of their agendas, both sides have so far only drawn a line in the sand regarding taxes and spending rollbacks that are positioned exactly where those lines have been drawn for several years.

And based on the history on both sides of the Atlantic, and the rhetoric taking place so far, before and after the election, it certainly looks like once again it will be the action of the markets and not other pressures to act that will dictate how soon talks become serious and negotiations make progress.

So far, the market's plunge since the election does not seem to be enough to have their attention.    

And if the short-term oversold condition of the market creates even a brief oversold bounce it would likely encourage them to believe they can take the country even closer to the edge in an effort to give in as little as possible.

Still no re-entry signal for our Seasonal Timing Strategy.

The basic ‘Sell in May and Go Away' strategy calls for exiting May 1 and re-entering November 1, and so has seen its re-entry signal into its next favorable season triggered already. And it has a remarkable long-term performance history.

But our Seasonal Timing Strategy, which is more precise with its calendar entry and exit dates than simply using month-ends, and then combines those specific calendar dates with a technical indicator, MACD, has still not triggered its re-entry signal. (When the calendar date arrived, MACD was on a sell signal, delaying the re-entry until MACD triggers its next buy signal).

And thus, by adjusting the entries and exits based on what the market is doing at the time each year, does our STS strategy have a proven record of doubling and tripling the performance of the S&P 500 over the long-term, while taking roughly 50% of market risk.

To read my weekend newspaper column click here: Probabilities For Market Going Forward!

Subscribers to Street Smart Report: There is an in-depth U.S. Markets update from yesterday in your secure area of theStreet Smart Report website.

Yesterday in the U.S. Market.

The U.S. market closed down sharply, accelerating its decline through the afternoon to close almost on its low for the day, with the Dow down 185 points.

Volume was a bit above recent levels, with 0.83 billion shares traded on the NYSE.

The Dow closed down 185 points, or 1.5%. The S&P 500 closed down 1.4%. The NYSE Composite closed down 1.5%. The Nasdaq closed down 1.3%. The Nasdaq 100 closed down 1.2%. The Russell 2000 closed down 2.0%. The DJ Transportation Avg. plunged 2.6%. The DJ Utilities Avg closed down 1.0%.

Gold closed up just $2 an ounce to $1,726, about 0.1%, but the XAU Index of gold-mining stocks plunged a huge 4.7%.

Oil closed up $.88 a barrel at $86.26 a barrel.

The U.S. dollar etf UUP closed down 0.1%.

The U.S. Treasury bond etf TLT closed up 0.1%.

Yesterday in European Markets.

European markets closed down again yesterday. The Europe Dow closed down 0.9%. Among individual countries the London FTSE closed down 1.1%. The German DAX closed down 0.9%. France's CAC closed down 0.9%. Greece closed up 2.5%. Ireland closed down 1.8%. Italy closed down 0.5%. Spain closed down 0.3%. Russia closed down 0.3%.

Asian Markets were mixed Tuesday night and down last night.

The Asia Dow closed up 0.3% Tuesday night, and down 0.9% last night.

Among individual markets last night:

Australia closed down 0.9%. China closed down 1.2%. Hong Kong closed down 1.5%. India closed down 0.8%. Indonesia closed up 0.4%. Japan closed up 1.9%. Malaysia closed down 0.3%. New Zealand closed down 0.1%. South Korea closed down 1.2%. Singapore closed down 1.1%. Taiwan closed down 0.2%. Thailand closed down 0.4%.

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Markets This Morning:

European markets are down again this morning. The London FTSE is down 0.4%. The German DAX is down 0.9%. France's CAC is down 0.4%.

Oil is up $.26 a barrel at $86.58.

Gold is down $4 an ounce at $1,722.

This Morning in the U.S. Market:

This week is an average week for potential market-moving economic reports, including the Producer Price Index, Retail Sales, the Fed's Phila Fed Index, Industrial Production, etc. To see the full list click here, and look at the left side of the page it takes you to.

There were no reports in the U.S. on Monday.

Tuesday's report was that the NFIB's Small Business Optimism Index edged up 0.3 points in October to 93.1. Drilling down in the numbers, the NFIB said that the percent of owners uncertain whether business conditions will be better or worse six months out was at a record high of 23%.

Outside of the U.S., Germany's ZEW Expectations Index, which is based on a survey of financial market professions, unexpectedly fell to –15.7 in November from –11.5 in October. It had been forecast to rise to +10.

And in the U.K. it was reported that inflation moved up sharply in October, to 2.7% from 2.2% in September, well above the Bank of England's target of 2%. It raises concerns about about the BOE's QE easing program, which the BOE has been promising would not be inflationary.

Yesterday's reports were that Retail Sales were down 0.3% in October, their sharpest decline since June. And the Producer Price Index declined 0.2% in October. The core rate, which excludes food and energy, also declined 0.2%. The minutes of the Fed's last FOMC meeting were released in the afternoon and revealed no important new information.

This morning's reports were that new weekly unemployment claims surged up by a huge 78,000 last week to 439,000. But it was apparently distorted by the huge number of claims filed in the northeast as a result of hurricane Sandy closing businesses. The 4-week moving average rose by 11,750 to 383,750. Consumer Price Index rose just 0.1% in October, and the core rate rose 0.2%. The Fed's Empire State (NY) Mfg Index remains negative in November but improved fractionally, from –6.1 in October to 5.2 in November.

Still to come is the Philadelphia Fed District's Mfg Index, which will be released at 10 a.m.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being down 10 points or so in the early going this morning, meaningless as to direction later.

To read my weekend newspaper column click here: Probabilities For Market Going Forward!

Subscribers to Street Smart Report: There is an in-depth U.S. Markets update from yesterday in your secure area of theStreet Smart Report website.

I'll be back with the next regular blog post on Saturday morning, as usual later than the week-day posts, probably around 11:00 a.m.

Non-subscribers:We believe we can help you not only make more profits, but just as importantly avoid losses, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert's Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest's rankings.

And we are off to a good start this year. And we moved up to #1 Long-Term Market Timer in Timer Digest's April issue, #2 Gold Timer for last 12 month period in its September issue.

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