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Wall Street Faces Off With the Fiscal Cliff

With the end of 2012 on the horizon, investors still have one final hurdle to overcome to close out the year. With QE3, the presidential election and earnings results all in the rear view mirror,

With the end of 2012 on the horizon, investors still have one final hurdle to overcome to close out the year. With QE3, the presidential election and earnings results all in the rear view mirror, Wall Street and Main Street will now face arguably the largest challenge yet. The fiscal cliff will need to be addressed by lawmakers in Washington, and inability to do so could put investors and the U.S. economy at risk. Stocks have already shown some weakness, especially following the major sell-off following last week’s election results, and bulls are in desperate need of some form of catalyst to spark a year-end rally. Will it happen?

In this week’s interview with Toni Turner of TrendStar Trading Group, we discuss what  the prospects of the coming spending cuts and tax increases could mean for the market, and if there is any reason for investors to be hopeful for the holidays.

EQ: It seems that with the presidential election behind us and third quarter earnings wrapping up, focus on the fiscal cliff is intensifying. How much of a dark cloud will this become as we get closer to the end of the year?

Turner: The prospect of higher taxes on capital gains is encouraging many investors to unload winning stocks and take profits. Of course, the stock market doesn’t like a cloudy economic future, and to the degree in which uncertainty reigns, the market could stay volatile at least through the end of the year. I’m aware that the iPath S&P 500 VIX ST Futures ETN (VXX) has pulled back on Monday—the bond market was closed due to Veterans Day–but whether it will continue to be so calm remains to be seen. The VIX is sitting on support now on its 50-day moving average, but we don’t know how long that will last. If we get rumors out of Washington that the lawmakers are making headway, the market could move up dramatically. However, if rumors are exposed as false, then the market could tumble as well.

EQ: The major indices sold off after the election results last week, with the S&P 500 breaking below 1400. What levels are you watching now to see if the index holds up or falls lower?

Turner: If you take Fibonacci retracement levels and measure from the June lows to the recent September highs, you will see that right now at the 1374 level, the S&P 500 level has retraced nearly 50 percent of that move up. If it moves below 1370, which is the actual 50-percent line, then we could see a move down to 1345 , which is the 62-percent level. Interestingly enough, on a monthly chart, the S&P 500 is still in an uptrend, but a move below 1266 would break that trend and would be very bearish for stocks. So ideally, we want the S&P 500 to stay above 1366 at least, and move higher through our current resistance of 1475 and back up to 1550 and higher. Now, my question is, “Santa, are you listening?”

EQ: What are some prospects that could help spark the market to move higher?

Turner: Certainly if the powers that be in Washington would at least solve some of the fiscal cliff concerns and keep capital gains tax at 20 percent or lower, one would think that could help the market move higher. We may get a Santa rally toward the end of the year, and my line of thinking for that is just because so many stocks have sold off so dramatically—Apple (AAPL) and Utilities (XLU) are a few examples. But we need strong buying. In the stock market, you need strong buying on strong volume to make it move higher. Will we see that? What will the catalyst be?

EQ: Speaking of the holidays being right around the corner, is now the time to start looking at consumer-oriented stocks more closely?

Turner: I did look through quite a few retail stocks, but unfortunately, it looks like a lot of them are getting caught up in the tax-induced selling. My two favorites are Nordstroms (JWN) and Macy’s (M), but they’re certainly caught up in that, and even the current darling Michael Kors Holdings (KORS) is taking hit. Conversely, Dillard’s (DDS) is doing well, and Family Dollar Stores (FDO), which is one of our trading ideas in Toni’s Market Club, is also holding its own right now.

EQ: What sectors or groups are you watching for this week?

Turner: I’ve gone through all of the S&P 500 sectors and all nine of them are trading below their 50-day moving averages. Right now, I just don’t see much out there. I think there will be, but as of right now, I want to see more of a bottom put in first and that’s not happened just yet. This week, we have options expirations on Friday, and that may do the trick. Next week is Thanksgiving and markets usually rally on the week of a holiday. So we may see a Thanksgiving rally, but it’s too uncertain to say at this point.

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