Current Market Outlook - Dec-31-2012

Market Outlook - 12/31/2012

US financial markets logged a roughly 2% drubbing across the major market indices in a holiday shortened week ending 12/28/2012. The markets suddenly realized that the fiscal cliff resolution which was priced in the market was not as easy as it initially seemed and that resulted in shaving off the last ~3% from S&P 500. Initially there was a lot of optimism around the fiscal cliff deal (which still hasn't materialized!) and which pushed the market (S&P 500) up around 6% from the mid 1300's in S&P 500 (mid Nov 2012) up to around mid 1400 (mid Dec 2012), before reality set in. The good thing with this market draw-down and year-end & tax hike fear selling is that markets are getting reset to a level which is going to put it at a sweet spot for the year 2013.

YTD gains for NASDAQ and S&P 500 include a respectable 13.63% and 11.52% respectively. DOW managed to eke out a gain of 5.9% YTD. For the next few weeks as we move into 2013 a critical level to watch for in S&P 500 is around the 1390-ish which is where the 200 MA support lies for the index. Failure to reach some sort of compromised fiscal cliff deal would send the index down below this level for sure. The effect of fiscal cliff is not only felt in the market indices but also in economic indicators like The Conference Board's 'Consumer Confidence Index' which dropped sharply to 65.1 for December from 71.5 in November 2012. 

All eyes would be on Washington over the next few days and weeks to see the quality of the fiscal cliff deal stitched together by the politicians. Since I am long-term bullish on the financial markets any major sell-off would give an opportunity to pick up some of the names which has performed in this market on the cheap. Also first half of 2013 is expected to be choppy with volatility setting in and some of the economists predicting even a recession. It remains to be seen whether we do a nose-dive over the cliff or avert the dive and just slide-down. Last time when the country was in such a fiscally tight-corner Washington failed to reach a decision on the debt-ceiling levels and that led to downgrade of US credit rating by Standard & Poors (S&P) from AAA to AA+. The lessons learned from last time is that we should not be optimistic of our politicians reaching an agreement at the last-minute at Washington. Having said that I think we may be able to avoid any major recession (or for that matter any recession at all) and Washington would put together a deal of some sort. If not then put on your seat-belts because it is going to be a bumpy ride!