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For Investors, It’s Flight or Fight Time as Fiscal Cliff Approaches

Since returning from the holiday weekend, stocks have ran into a wall, essentially losing most--if not all--of the upward momentum gained from last week's gains on thin trading. As worries

Since returning from the holiday weekend, stocks have ran into a wall, essentially losing most–if not all–of the upward momentum gained from last week’s gains on thin trading. As worries regarding the fiscal cliff, Europe’s woes, and other economic headwinds mount, investors have a harder time staying optimistic as each day passes without any real progress being made for resolutions.

We asked Toni Turner of TrendStar Trading in this week’s interview what she thinks about the current state of the market as we head down the final leg of 2012, and if investors could be moving more toward safe plays to close the year.

EQ: Like most people, the market slowly came back to reality after enjoying a week of good vibes over the holiday, edging lower on concerns over the fiscal cliff and a slow economy. Are stocks losing the momentum from last week?

Turner: It does look like we are losing momentum from last week. We had many stocks enjoy a very steep price-angled rally, and certainly the indices did. The markets, as we discussed in last week’s conversation, like to rise the week before Thanksgiving. So now we’re back to reality.

The S&P 500 is hanging out at one of its favorite levels, which is 1400. Monday’s price action was down but not dramatically. So after the last few up days, either we have pulled into a rest stop and Monday was a refreshment day, or it could become part of a short-term topping pattern for the S&P 500 to retrace part of last week’s move up. The market could intend to continue up through the September lows and that zone of resistance, but we won’t know which way it intends to go for the a few more days.
On the good news side, the iShares Dow Jones Transportation Average (IYT) rose on Monday, and was trading at its highs. So if transportation stocks can stay strong, that is good news. It all goes back to the old theory that we want the Dow Jones Industrial Average and the Dow Jones Transportation Index to go up simultaneously because that indicates a strong market environment. Certainly, the Dow was not up yesterday, but at least transportation stocks were up, so maybe things are not as dire as they look.

EQ: We saw investors move into Treasuries after returning from the holiday. With yields going down and rates not expected to go up anytime soon, it does seem like there’s a flight to safety as Congress deals with the fiscal cliff. Is this a bad sign for stocks and the potential for a year-end rally?

Turner: In a general sense, a flight to safety takes place when the market moves down and bond prices move up. Investors are looking at bonds as a safe haven from the fiscal cliff talks. Also, for the past four years, the Federal Reserve has been a very generous buyer of bonds. Many investors expect that action to continue until 2013 still. With that said, the Fed’s only remaining meeting this year takes place on Dec. 11, and there is no guarantee that the central bank will continue to buy treasuries at such a generous clip.

So while it may be a safe haven for people to go into right now, whether or not they’re going to have the central bank backing after the first of the year is another wrinkle in that particular fabric. I do know people are getting nervous because I see more action coming into Utilities, and that’s always a sign that people are getting nervous, even though that  sector had sold off dramatically.

EQ: Sales for Black Friday and Cyber Monday hit record numbers. Is it too late to make a play on this? Did these numbers surprise you?

Turner: I think the numbers surprised a lot of us—certainly in a good way. Sales were robust and total spending for the weekend was reaching an estimated $59.1 billion, which is a 13-percent increase from last year. However, a strong kick-off for the holiday shopping is not a guarantee that sales for the season will continue to rise. For traders, we saw online retailers like Amazon (AMZN) and eBay (EBAY) rise nicely last week, as well as other brick-and-mortar stores. At the moment, however, it looks like the shorts are starting to pound many of the retailers. I checked out Costco (COST), Nordstrom (JWN), and Macy’s (M) and they looked like they were getting the short’s attention . They may have gotten ahead of themselves. After all, the fiscal cliff still looms, which could mean that consumers will have less money in the long run to spend. That could take a little air out of the retailers. I think the retail  trade, at least on the long side, is best left alone for a few days until we see if these retailers can find support on their price charts.

EQ: We’re entering the final stretch of the year as we hit December at the end of the week. What are some groups or sectors that you’re watching this week?

Turner: Well, of course I’m back to my favorite, Utilities Select Sector SPDR (XLU) right now. The XLU is consolidating here and one thing we have to remember with Utilities is they sold off on the threat of tax hikes on dividends, but that selloff may have been a little overdone. So that provides us with opportunities as traders and investors in our tax-advantaged accounts such as our IRAs. After all, many of these high quality companies are going to be paying even higher dividend yields at these prices. So one level I’m watching is to see if the XLU can hold support here at about $34.

I’m also watching an ETF that I’ve been watching for quite a bit. The PowerShares Water Resources (PHO) has gone up quite a bit on the drought. I’ve been watching it for a while to see if it can break $20, and I don’t know if now is the time, or if it needs to pullback a bit first. But you know me, I’m always pounding the table on water and I do think at some point in the not-too-distant future, it’s going to be in the spotlight much more than it ever has before.

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