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What Could a 'Cliff Dive' Do to the Economy?

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Despite the short-term overbought condition, I think the upside should continue to be favored.

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Moreover, Congress twiddled its thumbs until December 23 before extending the payroll tax-cuts. If past is prelude, the same thing will happen here with either a full resolution to "the cliff," or a staged-in solution. In past comments I have postulated that perhaps the $55 billion of tax cuts to the wealthy, of the $265 billion of Bush tax cuts, would be rescinded while the remaining $210 billion of middle-class tax cuts would be extended. Further, I think most of the mandated spending cuts will be postponed.

Clearly, the stock market believes something positive regarding "the cliff" is in the works as it continues to trade in a perky fashion. While it is true the S&P 500's (INDEXSP:.INX) sprint from its November 16 oversold "low" has left it very overbought in the short-term (see the chart below), and in need of a rest to work-off that condition, beneath the surface there are some pretty bullish occurrences. For example, the Dow Jones Industrial Average (INDEXDJX:.DJI), the Dow Jones Transportation Average (INDEXDJX:DJT), the NASDAQ Composite (INDEXNASDAQ:.IXIC), the Russell 2000 (INDEXRUSSELL:RUT), the SPX, et al., have traveled above their respective 200-day moving averages (DMAs); and the NYSE Composite (INDEXDJX:NYA) has actually crossed above its 50-DMA (8229.91).

In technical terms, 63% of the S&P 500 stocks are above their 200-DMAs, while 56.2% are above their 50-DMAs. Further, the NYSE Advance/Decline Line is approaching a new reaction high and the number of stocks making new 52-week "highs" is expanding. Even more significant is that credit spreads are narrowing, both here and in the "Club Med" countries, and the Volatility Index (VIX) is below 16. Importantly, the equity markets seem to be ignoring bad news, which is amazing given the severely overbought condition. To me, all of this is bullish.


Click to enlarge

Also bullish have been the housing numbers, despite last week's Hurricane Sandy affected numbers. While our fundamental real estate analysts downgraded the homebuilding stocks weeks ago on the belief this year's price appreciation was ahead of the fundamentals, there is a second derivative homebuilding "play" our analysts favor named Rayonier (NYSE:RYN). Another theme of mine is obesity, as the baby boomers turn 60 and move into their "diabetes years." Playing to this theme has been DaVita (NYSE:DVA). Last week, however, our fundamental health care analysts assumed research coverage of another diabetes stock named DexCom (NASDAQ:DXCM).

The call for this week: Despite the short-term overbought condition, which likely needs some time to be corrected while the SPX's internal energy level is rebuilt as it challenges the all-important "energy level" of 1420 – 1422 often referenced in these reports, I think the upside should continue to be favored. As my friend Frederick E. "Shad" Rowe, captain of the sagacious Dallas-based money management firm of Greenbrier Partners, writes:

The stock market will always do what it must to frustrate as many investors as possible. But as to its long term direction, I have little doubt. It is up. And as to the magnitude of that move, I would say "very large." As to timing, I am a little less clear. I do believe that patience will be rewarded and that the current opportunity is so compelling that the real fool's game remains, as it has throughout my career, attempting to time the stock market.

P.S. I am in New York City all week seeing accounts, doing media, speaking at conferences, but most importantly attending Minyanville's Festivus charity event to raise money for the financial education of underprivileged children.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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