Investors Eye Fiscal Cliff Countdown and Possible Santa Surprises

The fiscal cliff countdown continues with no progress in sight and 22 days to go.

The fiscal cliff ticked closer last week as U.S. stocks and ETFs rose slightly for the week and political leaders continued their sparring.  22 days remain until the cliff arrives on December 31st, however, this is the last week when Congress is scheduled to be in session with the Christmas break starting Friday, December 14th.

On My ETF Radar

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A quick glance at the chart of the S&P 500 (NYSEARCA:SPY) shows us that the index is still in a bear market, below its red bullish resistance line and with a bearish price objective of 1380.  However, the shorter term direction has been up and the index is in a range between 1350-1420 as the sideways action continues and market participants wait for resolution to the fiscal cliff.

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Major U.S. stock indexes and ETFs continue their sideways drift in anticipation of a resolution to the fiscal cliff.

Major ETF and Index Update:

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) added 1%, the S&P 500 (NYSEARCA:SPY) gained 0.1%, the Nasdaq Composite (NYSEARCA:QQQ) fell 1.1% and the Russell 2000 (NYSEARCA:IWM) gained 0.12%.

Gold (NYSEARCA:GLD) declined 0.5% and oil (NYSEARCA:USO) fell 3.2%.

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Apple (NASDAQ:AAPL) continued making news last week and dragging down the Nasdaq (NYSEARCA:QQQ) as the largest company in the world declined 8.9% from last Friday’s close and now is 24% below its recent September high.

In economic news, Friday’s Non Farm Payrolls report showed that jobs climbed by 146,000 last month and unemployment fell to 7.9%.  Both headline numbers beat expectations, however, less widely reported was that the labor force participation rate continued to decline, down 0.2% to 63.6% as another 500,000+ people left the labor force.  Also, September and October employment numbers were revised downward.

Friday also brought December’s University of Michigan consumer sentiment index that registered a drop to 74.5 from last month’s 82.7 and missed expectations of 82 by a wide margin.  Earlier in the week, November’s ISM declined to 49.5, also missing expectations and putting the index into contraction territory.

On the good news front, ISM services climbed to 54.7 and construction spending for October was up.

This week brings more fiscal cliff debate and the widely anticipated Federal Reserve meeting on Tuesday and Wednesday with Chairman Bernanke’s press conference at the conclusion of the meeting.

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Regarding the fiscal cliff, apparently no progress was made this week and the clock continues ticking.  Still, markets appear to remain convinced that the stalemate will be broken in time as prices continued to advance for the third week in a row.

Besides the fiscal cliff debate, the Federal Reserve is expected to launch another round of quantitative easing to replace the Operation Twist program that expires at the end of the year.  The Federal Reserve is exhausting its supply of short term securities to sell and replace with longer term securities and so market players are expecting as much as another $50 billion/month in long term Treasury purchases to replace Operation Twist.  The Fed is also expected to leave interest rates near 0% at historically low levels as it continues its efforts to prop up the U.S. economy.

Almost lost in the news flow surrounding the fiscal cliff, Europe continues to slow as the ECB cut its forecast for European growth rates into 2013.

Significant economic data due for the week will be reports about jobs, retail sales, consumer and producer price indexes and industrial production.  Retail sales will be particularly closely watched as the effects of Hurricane Sandy should dissipate.

Bottom line:  Fiscal cliff countdown continues and markets players expect resolution.  The Fed meets and more easing is expected.  Any disappointments on either front will change the market tone while resolution could support markets over the short term.

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