Major averages were down Friday on higher, "quadruple-witching" day volume, after House Speaker John Boehner's "Plan B" proposal was rejected Thursday night, bringing the market one step closer to the edge of the Fiscal Cliff. Boehner on Saturday said he’s ready to return to the bargaining table to avert the fiscal cliff, but futures remain lower this morning as the market's begin to reflect some skepticism that a solution will be reached before year-end.
Economic news Friday was mixed. Durable durable goods orders for November came in stronger than expected and personal income topped concensus, but Reuters University of Michigan consumer sentiment index was weaker than expected. However, we believe the real short-term driver of market direction remains the Fiscal Cliff issue. Once it is resolved, quantitative easing will more than likely be a significant factor, once again, in any resumption of an uptrend as it had been for QE1 and QE2. But rather than make predictions, it is best to focus on price/volume action of major indices and leading stocks. Assuming the Fiscal Cliff is resolved, the uptrend should resume, barring any overtly negative news and assuming that the Fiscal Cliff is indeed the only overhang preventing this market from moving higher. The market's reaction following any Fiscal Cliff resolution should be telling, since if the uptrend fails to resume then the markets are likely telegraphing something negative that is not yet obvious. This type of market behavior was observed shortly after QE3 was announced in September. After a few bullish days, the markets started on a downtrend. At that point the markets were telegraphing concern about the fiscal cliff issue before it became major headline news.
Both SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) remain below their 200-day moving averages, and we see three factors putting pressure on the precious metals: First, given the long-term gains in gold and silver, the potential for higher capital gains tax rates in 2013 puts tax-selling pressure on the metals as investors seek to avoid the higher tax hit in 2013; 2) Because the Fed has announced it will peg injections of QE3 to GDP and employment growth, recent improvement in economic numbers could be seen as lessening the need for QE in the short-term; and 3) they could be presaging a walk over the Fiscal Cliff whereby automatic tax increases and spending cuts would take place, again lessening the need for QE. In the meantime, the precious metals have significant technical damage to heal at this time, and so remain well out of position for any possible new buy signals to emerge, at least in the short-term.
Volatilty will likely dominate the action as we move closer to year-end and the Fiscal Cliff negotiations reach a crescendo, and therefore we see no reason for investors to be making aggressive commitments at this time.