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Friday, December 21, 2012
INDEXES SLIDE AS HOUSE SCRAPS TAX VOTE; EUROPE SINKS
US equity indexes tumbled Friday, paring weekly gains, after House Republicans canceled a vote on higher taxes for top earners to avoid going over the fiscal cliff didn’t find enough support, sending budget negotiations deeper into turmoil.
The Congressional Budget Office forecasts a recession in the first half of the next year should the Congress and the White House fail to reach a deal.
On the economic news front, data released by the US government was positive Friday, especially a 0.7 percent hike in orders for durable goods in November. Separately, a Commerce Department report showed spending by US consumers rose 0.4 percent in November while personal income increased 0.6 percent in November, both figures coming in well above expectations.
Fiscal cliff worries, however, found their way into a gauge of consumer sentiment, dragging it down in December. The Michigan University/Thomson Reuters consumer sentiment index declined to 72.9, the lowest reading since January.
The Dow Jones Industrial Average (DJIA) closed 121 points lower at 13,191, after falling as much as 189 points during today’s trading session. Breadth within the benchmark turned negative with losers outrunning winners 28-to-2. The blue-chip index is still up 0.4 percent on a weekly basis.
The S&P 500 Index (SPX) shed 14 points to finish at 1430, with consumer shares sliding the most among its 10 business groups. The index is up 1.2 percent for the week.
Treasury prices rose, closing the week on a strong note as the year-end deadline for fiscal-cliff approaches with no plan from Washington to avoid it.
The US dollar meanwhile made steady gains against other currencies as traders sought out safe haven investments after lawmakers from both major US political parties continued to trade barbs, making investors pessimistic that a deal on avoiding spending cuts and tax hikes will be reached by the end of the year.
Led by risk sensitive sectors such as banks and resources, European stocks turned lower as worries over US budget negotiations triggered a sell-out, but they finished higher for the fifth straight week.
In the ETF space, bond-linked funds rallied as investors sought the relative safety of fixed-income securities after politicians failed to make headway in Washington. The Barclays 20+ Year Treasury Bond Fund (TLT) surged, adding 1.09 percent for the day.
As uncertainties mounted, the CBOE volatility index (VIX) rallied hard. The Barclays iPath S&P 500 VIX short-term Futures ETN (VXX) vaulted 6.83 percent during today’s session.
Our Trend Tracking Indexes (TTIs) while retreating today headed higher for the week and closed as follows:
Domestic TTI: +1.51% (last week +1.38%)
International TTI: +7.17% (last week +6.52%)
Again, we will be haunted the last few trading days of the year by more fiscal cliff mudslinging with a compromise always being a possibility. If none comes about, Friday’s sell off will likely be the precursor of things to come.
READER Q & A FOR THE WEEK
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A note from reader Lou:
Q: Ulli: What is the significance of the 200 day M/A moving over the 50 day M/A?
A: Lou: You probably meant it the other way around; when the 50 day M/A crosses the 200 day M/A…
That is an old trend following signal that some investors use. If the crossing is to the upside, it is referred to as the ‘Golden Cross;’ if it’s to the downside, it is called the ‘Death Cross.’
Since both indicators are moving averages, the signals happen with quite some delay within a major trend. It’s considered the final confirmation that a bull market is in full force (Golden Cross) or that a bear market is upon us (Death Cross).
Personally, I think these signals get you in the market too late and out of them also only after a severe market retreat, which is why I don’t use them.
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