The Market Missed That One

 | Dec 21, 2012 | 7:53 AM EST
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Surprise, surprise, surprise! -- Gomer Pyle

For several weeks now the market has been very optimistically predicting that a fiscal cliff deal would be made before the end of the year. What the market didn't count on was that Speaker Boehner would come up with a plan that neither the Democrats nor Republicans would accept.

No one expected Speaker Boehner's Plan B to pass the Senate, but the assumption was that it would make it through the House and be the basis for further negotiation. That turned out to be a very poor assumption and now the chances of a deal before the end of the year look remote.

What is particularly interesting is how the market didn't see this coming. The market is often given great respect as a discounting mechanism that prices in future events, but it was just dead wrong in this case. We even had a late rally yesterday in front of the Plan B vote as market players anticipated that a deal would eventually emerge from the political maneuvering. 

The big problem, of course, is that the market hates this uncertainty and no one knows how much longer it is going to drag out. The Democrats weren't even going to accept Boehner's compromise deal and they are just going to laugh at what some of the House Republicans are demanding.

The good news is that it has been very difficult to put money to work in this market recently, so hopefully folks aren't too heavily long. A pullback here will give us some new opportunities, but the timing of this action really causes a high level of chaos. I suspect many market players are simply going to shut down now and enjoy the holidays rather than suffer through more of this painful political sideshow.

One of the other negative consequences of this failure to make a deal is that it may push more market players to lock in profits and harvest capital gains out of fear of being hit with the fiscal cliff tax increases. A retroactive deal can be made in 2013, but there is some real danger now that we will be hit by substantial tax increases as the politicians drag this out.

Technically the S&P500 has had a very nice run for a month as it anticipated a deal, but now it looks like we will quickly test support at the 50-day simple moving average around 1413.  That will put the recent uptrend in question and many will be looking for downside momentum to build as the fiscal cliff takes a toll on the economy.

One of these days we will have a market again where we can focus on stock picking rather than central bankers and politicians, but today is not the day.  We are handcuffed by the headlines and many market players are simply going to throw in the towel and ignore this market for a while.

We'll see if we have any sort of bounce after the open, but it is likely that many market players will be using strength as a means of escape. I will be in no big hurry to add long exposure right now.

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