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Fiscal Cliff: What to Expect If There's No Deal By Today's Close

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Traders should look for a marginal "up" opening followed by attempts to sell stocks off with lower prices due by the bell.

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I was on Bloomberg Thursday with the always insightful anchor Erik Schatzker. The interview was going pretty well until about halfway through when Eric said:

I'm confused -- about two weeks ago, we were talking about a market that had priced "in" a deal on the fiscal cliff by January 1, 2013; and you said yourself that as of last Thursday (December 20, 2012), you were still thinking the same thing. At the time, we were talking about going over the fiscal cliff as an Armageddon event. Now that we don't think we're going to get a big deal come January 1, why is the market trading down a lot harder?

I responded, "Well, I don't think the market is trading down all that hard and I think it was the media that called it Armageddon. If you talk to a lot of the strategists on Wall Street ..."

And with that, Eric interrupted me in mid-sentence by stating, "You know, that's not true! Jeff, I don't mean to argue with you, but we've had countless guests of serious caliber here, some of the biggest investors in the world, some of the most talented hedge fund managers in the world, with long track records to prove it. And they said it was going to be a serious event; if not Armageddon, something close to disaster. So, I wouldn't blame it on the media."

You can see the entire interview here. However, for the record, in the Bible's Book of Revelations, Armageddon means the end of the world. I thought that was supposed to happen on December 21 according to the Mayan calendar; it didn't. I don't think it will happen on January 1, either. Additionally, I didn't say anything about hedge fund managers or big investors -- I said "strategists." And I still don't know any strategists at the major firms that are terming the fiscal cliff Armageddon, which would mean the end of the financial markets as we know them.

The interview concluded with me saying, "I lived inside the DC Beltway, and when things absolutely had to happen, they have typically happened. So even if we go over 'the cliff,' I don't think it will be Armageddon. There will be some kind of solution worked out in the first few weeks of January." By the way, the first people I heard referring to the "cliff" as being Armageddon was absolutely the media.

So we wait for the alleged Armageddon for the second time in as many weeks. Actually, I think Treasury Secretary Tim Geithner best described the fiscal cliff when he termed it an "orchestrated drama." And as one smart money manager writes, "We should not forget that Congress has a magic eraser. No matter what they do, with a few strokes of a pen everything goes back to effectively January 1, 2013 and the fiscal cliff will take its place on the great wall of media creations (remember Y2K?)." Whether you call it Armageddon or "orchestrated drama," there is nothing in my bag of tricks that suggests this is the beginning of a massive decline for stocks. For example, the NYSE Advance/Decline line registered a new bull market high last week. The Dow Jones Transportation Average (INDEXDJX:DJT) has broken out to a new reaction high and all that happened in last week's decline was that the transports pulled back to their upside point of breakout (read: support level). Then, too, it is a good sign that the Russell 2000 (INDEXRUSSELL:RUT), as well as the transports, are outperforming and continue to remain above their respective 50-day moving averages (DMAs).

Meanwhile, European markets are up, the Chinese markets have been on fire, and even Japan has taken a turn for the better under new leadership. Recall, I tried being bullish on Japan using their small-capitalization and dividend-paying ETFs back in 2009. Initially we made some money, but ended up giving most of the profits back because I thought Japan was an investment when it turned out to be only "a trade." One of the major things that foiled my Japanese investment recommendation in 2009 was the strength of the yen. This time, that may not be the case. To wit, my friends at Wisdom Tree have an exchanged-traded fund (ETF) named WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ). The fund has a yield, but its real redeeming feature is that it hedges out much of the currency fluctuations between the US dollar and the Japanese yen. Ladies and gentlemen, Japanese stocks are profoundly "cheap;" and as my father taught me, "Good things tend to happen to cheap stocks."
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No positions in stocks mentioned.
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