Cliff Diving – Day 14

This market wants to rally.

It certainly feels that way after yesterday’s trading — big downdraft at the open only to reverse and close up big and at the highs — coupled with today’s resilience after speaker Boehner’s negative comments.  We sense a market with real money sidelined and dominated by traders with a short time horizon.  Real short.

Stocks are almost back to unchanged since the election.  The Russell was up over 1 percent today and flat post election.  Defense stocks are now positive signalling “don’t fear the sequester.”

We also sense the massive monetary stimulus is starting to gain some real traction.   Furthermore, the European sovereign debt and banking crisis is moving to the back burner with Italian 10-year bond yields and spreads hitting 52-week lows today.   China’s ugly stock market concerns us,  however.

As we have experienced over the past few days betting on going over the fiscal cliff is not without risk.  With so many running money, so far behind their benchmarks, December is about to get very interesting.   The market feels it is spring loading for a huge pop on any sign of movement toward a deal.

The Wall Street Journal is just out with a piece stating the Republicans have rejected the President’s opening offer, which includes $1.6 trillion in tax revenues and a permanent lifting of the debt ceiling.  The debt ceiling is the Republicans nuclear option and doubt they will give it away for nothing.

We expect continued volatility as negotiations progress and by the end of next week the market will need to  see some movement on both sides or stocks may start to kick into panic mode.   Enough of this posturing in front of cameras that is causing the nauseating market whipsaws.

Place your bets.

Despite claims that the president supports a balanced approach, the Democrats have yet to get serious about real spending cuts…Secondly, no substantive progress has been made in the talks between the White House and the House in the last two weeks.

- Speaker John Boehner

What would a real fiscal cliff panic look like?

Stocks down hard;  Russell 2000 down harder;  consumer discretionary down hard;  gold up;  dollar down;  VIX spiking;  and defense stocks in the tank.

Bonds?   Tough to extract a clear signal with the Fed’s financial repression, but, initially,  the cowboys would most likely be in buying on recession fears and increased worries about going over the cliff.

(click here if picture and table are not observable)

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