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Fiscal Cliff: Markets Will Dictate Timing Of Remedy

  • Written by Syndicated Publisher No Comments Comments
    November 17, 2012

    Throughout the crises of the last couple of years politicians around the world have proven beyond doubt that they have little incentive to work on the problems unless markets panic them into doing so.

    It was shown in Europe in the way government officials at the EU, IMF, and ECB only scrambled into weekend and overnight meetings and emerged with promises of dramatic programs they promised would solve the crisis when stock markets plunged, or bond markets spiked bond yields to danger levels in specific countries like Greece, Spain, Italy, etc., in the summers of 2010, 2011, and this year.

    And each time as soon as markets were encouraged by the promises and began to rally again, the politicians and officials returned to squabbling and arguing over the details of how and when to actually implement the promised actions – until markets became fearful and plunged again. 


    It was clearly demonstrated in the U.S. when Congress and the Federal Reserve only panicked into talking seriously of the need to act to re-stimulate the economy when the stock market plunged in the summers of 2010, 2011, and this year.

    And when the Fed took the whole load on itself with QE2 in 2010, Operation Twist in 2011, and QE3 this year, and the market began rallying again, Congress stuck its head back into the sand and saw no need to do its part on the fiscal side.


    And now, with the failure of QE2 and Operation Twist to have any lasting effect, and the hopes for QE3 being factored back out of the market now that it’s been announced, and the Fed out of ammunition, the ball is fully in the hands of Congress.

    And its first and most serious challenge is to resolve the ‘fiscal cliff’, or at least kick it down the road, before year-end.

    But while both sides of the aisle profess that this time reaching a compromise is of utmost importance and at the tops of their agendas, both sides have so far only drawn a line in the sand regarding taxes and spending rollbacks that are positioned exactly where those lines have been drawn for several years.

    And based on the history on both sides of the Atlantic, and the rhetoric taking place so far, before and after the election, it certainly looks like once again it will be the action of the markets and not other pressures to act that will dictate how soon talks become serious and negotiations make progress.

    So far, the market’s plunge since the election does not seem to be enough to have their attention.    

    And if the short-term oversold condition of the market creates even a brief oversold bounce it would likely encourage them to believe they can take the country even closer to the edge in an effort to give in as little as possible.

    Still no re-entry signal for our Seasonal Timing Strategy.

    The basic ‘Sell in May and Go Away’ strategy calls for exiting May 1 and re-entering November 1, and so has seen its re-entry signal into its next favorable season triggered already. And it has a remarkable long-term performance history.

    But our Seasonal Timing Strategy, which is more precise with its calendar entry and exit dates than simply using month-ends, and then combines those specific calendar dates with a technical indicator, MACD, has still not triggered its re-entry signal. (When the calendar date arrived, MACD was on a sell signal, delaying the re-entry until MACD triggers its next buy signal).

    And thus, by adjusting the entries and exits based on what the market is doing at the time each year, does our STS strategy have a proven record of doubling and tripling the performance of the S&P 500 over the long-term, while taking roughly 50% of market risk.



    To read my weekend newspaper column click here: Probabilities For Market Going Forward!

    Subscribers to Street Smart Report: There is an in-depth U.S. Markets update from yesterday in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!