Fiscal cliff, gloom & doom

I tend to fear that event which we have not yet imagined– and NOT fear the event that everyone is talking about. Take the so-called “fiscal cliff”, for example. This reminds me of the fears by market participants during the Y2K transition. You will recall the fears in 1999, prior to the year 2000 change. Planes were going to fall out of the sky, bank computers were expected to crash and we’d all have zero cash balances when we woke up on January 1, 2000. Power companies would be shutting down, and your PC would self destruct. Riots would ensue. One person I knew at the time bought right into the fear. He literally (no joke) built an underground shelter (he lived in the country), stocked it with canned goods and bought physical gold bullion. Well, at least the bullion has gone up—hopefully enough to compensate for his underground shelter expenses…

Back then, we knew about the potential negative implications of Y2K. As such, governments, institutions, corporations, software companies— everyone– did something about it. It turned out to be the Non-Event of the Century.

I don’t fear the fiscal cliff. Politicians are aware of its negative potentials. It’s a known negative event – thus, it can and will likely be resolved, or at least pushed forward to allow time for resolution. Recent panic over the Obama election and his lack of action (however unpopular he may be with Wall Street) is likely unfounded As such, I believe that the fiscal cliff, which is the most talked about event of the moment, is likely to be dealt with constructively in some manner. I think, like with Y2K, we’ll all wake up on January 1^st of next year and discover the world isn’t over just yet. So take a deep breath, folks, and let’s look at the charts for some unemotional guidance.

The S&P broke its 200 day MA: does this spell doom for the markets?

To address the significance of the recent 200 day MA break for the S&P 500, I’d like to quote Jason Goepfert’s comments from one of his emailed updates I get as a subscriber to www.sentimentrader.com. I’d encourage anyone interested in rigorous market and sector statistical studies to take a look at this site’s services.

Jason notes the potential near-termed implications of this recent break, and its longer termed potentials. From my own discipline, I tend to find breaks in important MA’s are not significant unless that break stays below (or above) that MA for a reasonable time—at least a week or longer. Here is Jason’s very interesting commentary (note that I didnt print his table–but his commentary summarizes his findings well enough):

When an index like the S&P 500 moves above or below its 200-day average, it tends to get attention. The S&P is the most widely benchmarked index in the world, and the 200-day average is used as a proxy for the index’s trend even by those who don’t traditionally follow technical analysis. On Thursday, for the first time in more than 100 days, the S&P dropped below that average, causing many to now consider the index to be in a downtrend.

What’s notable about its 100+ days above the 200-day average is that the index had also reached a multi-year high during the past couple of months. Such a prolonged uptrend and to such important heights is important to put the recent decline into context.

The table below shows every other time since 1929 that the S&P managed to go at go at least 100 days above its 200-day average, and hit at least a 3-year high sometime during the past 3 months.

The column that sticks out the most is the index’s performance one month later. In those cases, the S&P sported a positive return 20 out of 25 times. Out of all of those, there was only one that led to more than a -3% loss, which was 1987 (the outlined row in the table). The S&P crashed two days after closing below its 200-day average. Other than that notable exception, the S&P did quite well. It was positive with only a few minor quibbles, and its median return was twice that of any random one-month period. Unfortunately for the bulls, that consistent out-performance did not last. Shortly afterward, the index went into a funk in 1946 and 1966, and overall the S&P fall back toward random returns.

Selling like we’ve seen lately might be an ominous longer-term sign, but in the intermediate-term, we’re becoming increasingly likely to see a reprieve of the selling pressure.