And Again, Little Matters but the Cliff

 | Dec 10, 2012 | 8:22 AM EST
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If you spend your whole life waiting for the storm, you'll never enjoy the sunshine. --Morris West 

Probably the most surprising thing about this market lately is how sanguine it is about the "fiscal cliff" issue. The media have been covering this story on a nonstop basis, and there's been no shortage of doom-and-gloom scenarios -- yet the market has collectively shrugged, and has held up extremely well, with the exception of the mighty Apple (AAPL). It is obviously confident that a deal will be done and that the U.S. will be saved from economic Armageddon.

Still, the challenge has been that we aren't seeing any real speculative interest of strong buying momentum. Small-cap names have done virtually nothing recently, the Nasdaq 100 has lagged and the S&P 500 and Dow have shown relative strength mainly due to some buying in banks and financials. Plenty of stocks are holding up well and look OK, but very few are exhibiting any exceptional momentum. That is certainly better than weakness, but it hasn't made for very interesting trading recently.

Obviously what market players are counting on is a euphoric response to news that a fiscal cliff deal has been made. They want to have long exposure in place so they can benefit from the inevitable spike that will result when that news hits. On the other hand, there is still some fear that a clean deal will not be made -- and, of course, the timing is problematic. Many expect negotiations to go right down to the deadline.

Quite a few market players are looking for a fiscal-cliff deal and a brief rally, but then they expect that the full brunt of the problems will have yet to weigh in. Even if the fiscal-cliff problem is taken off the table, there will be no shortage of economic issues and problems in Europe. Probably the biggest worry is that fourth-quarter earnings will be as dismal as we saw in the third quarter. 

For now, though, the action is all about being in front of the fiscal-cliff news. Nothing else matters very much at the moment.

My approach to this market has been to try focusing on quick trades, but the lack of momentum and the flat action in small-caps has made that quite challenging. There just isn't much life out there, and there aren't many pockets of the type of trading action we usually see in churning markets such as this.

Even though we've seen rather limited trading for the bulls, the bear side of this market looks far more dangerous. Pullbacks have been very shallow and very brief of late. Apple has worked for the shorts, but there isn't much else, and obviously there is significant danger of being on the wrong side of the action should we see positive fiscal-cliff news.

Like everyone else, I'd prefer to move beyond this very tiresome fiscal cliff issue, but it looks as though it will continue to dominate. The best we can do is to focus on some individual stock-picking and see if we can book a few things while we wait for the politicians to finish playing their games. It isn't exactly a grand strategy, but sometimes that is all we have.

We're seeing a little softness this morning on some political issues in Italy, but overall the action is quiet and slow.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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