All Eyes on Fiscal Cliff: Will Panic or Surprise Surface in 2013?

Will 2013 start with a dive off the fiscal cliff?

As 2012 draws to a close, the fiscal cliff issue comes down to the wire and new challenges face investors as 2013 approaches.

Regardless of if, when or how the fiscal cliff issue is resolved, the next big hurdle for U.S. stocks and ETFs is the budget ceiling debate set to start in January.  Of course, the last budget ceiling debate stalemate led to the current issue with the fiscal cliff and so rough water could lie just ahead in the New Year.

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On My ETF Radar

s&p 500, spy, fiscal cliff, etfs

In the chart above of the S&P 500 (NYSEARCA:SPY) we can see how the fiscal cliff has impacted this major U.S. ETF index.

Momentum and relative strength are in decline, as seen in the upper panels, and the S&P 500 Index (NYSEARCA:SPY) has once again fallen below its 50 day moving average, a short term sign of weakness.

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Major resistance lies at the 1450 level with major support at the 200 day moving average.

The S&P 500 (NYSEARCA:SPY) will need to clear resistance to resume the uptrend, while a drop below the 200 day moving average would be a negative technical signal.

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The fiscal cliff debate and attendant uncertainty generated a significant sell off in the closing minutes of last Friday’s session and left all  major indexes down for the week.

President Obama returned to Washington early from his Hawaiian vacation and on Sunday the Senate continued wrangling with the fiscal cliff issue.  As the clock ticks, it’s hard to imagine that an 11th hour save would be forthcoming, particularly in regards to the two thorniest issues of spending cuts and tax hikes.

Regardless of the outcome of these last minute talks, the debt ceiling debate lies just ahead and creates significant danger for U.S. investors who can remember the summer of 2011 when the S&P 500 (NYSEARCA:SPY) fell more than 15% during the last debt ceiling standoff.

Major U.S. stock indexes have lost ground for five sessions in a row and face a shortened trading day on New Year’s Eve and are closed on New  Year’s Day.

On Friday, the Dow Jones Industrial Average (NYSEARCA:DIA) dropped 1.2% and was down 1.9% for the week.

The S&P 500 (NYSEARCA:SPY) fell 1.1% on Friday and 1.9% for the week.

The Nasdaq 100 (NYSEARCA:QQQ) declined 1.0% on Friday and the Russell 2000 (NYSEARCA:IWM) dropped 0.63%.

For the week, the Nasdaq 100 (NYSEARCA:QQQ) lost 2.2% and the Russell 2000 (NYSEARCA:IWM) slipped 1.97%.

Economic news last week showed improvements in unemployment claims and the housing market offset by declining consumer confidence and sentiment.

This week brings the New Year Holiday and then on Wednesday comes December ISM Report.  Thursday features ADP Private Employment Report, weekly jobless claims and car sales, and Friday will wrap up what is likely to be a dramatic week with December Non Farm Payrolls Report, monthly unemployment, ISM Non Manufacturing and November Factory Orders.

Bottom line: The fiscal cliff debate comes down to the 11th hour and most market participants still believe a settlement will be reached.  No matter what happens with the fiscal cliff, a steeper cliff awaits in early January with the looming debt ceiling debate.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.