How far will the market fall if we go over the cliff?

Disappointment over a lack of an agreement by Christmas could result in an immediate selloff.

By InvestorPlace Dec 14, 2012 1:09PM

Arrow Down copyright ImageSource, PictureQuestiplogoBy Sam Collins


Stocks slipped for most of the day Thursday following House Speaker John Boehner's negative comments on the lack of progress on averting the fiscal cliff. He even suggested that President Obama was willing to go over the cliff in order to push ahead with his position on tax cuts for the wealthy. 


A late-day announcement that the president and speaker would meet at 5:00 p.m. caused a minor rally, but even most of that was taken back before the close.


At Thursday's close, the Dow Jones Industrial Average was off 75 points at 13,171, the S&P 500 fell 9 points to 1,419, and the Nasdaq lost 22 points at 2,992. The NYSE traded 662 million shares and the Nasdaq crossed 398 million. On the Big Board, decliners outpaced advancers by 2.3-to-1, and on the Nasdaq, decliners were ahead by 1.7-to-1.


UUP Chart
Click to Enlarge


Trade of the Day Chart Key


While investors' attention has been focused on the fiscal cliff, the U.S. dollar has been strengthening. As illustrated by the PowerShares DB US Dollar Index Bullish Fund (UUP), the dollar appears to be putting in a bottom at current levels after falling from its 200-day moving average in November. MACD is positive as support is forming at the support line of a long-term bull channel.


NYSE Chart
Click to Enlarge


The NYSE Composite is an index of all stocks listed on the New York Stock Exchange. Therefore, it is often more representative of what the "stock market" is doing than other indices. Here we see that while the Dow and Nasdaq, and even the S&P 500, have been trapped in a narrow trading range, the NYSE Composite is just shy of a massive bullish breakout.


In November, it reversed from its intermediate support line, and for three weeks has been racking up gains. It is currently overbought as shown by the MACD indicator, and thus will likely pull back to support at its 50-day moving average. But the overall pattern is bullish and could even evolve into a massive reverse head-and-shoulders. We'll continue to focus on the chart during the next month.


Conclusion

The two charts shown today, UUP and the NYSE Composite Index, appear to be incompatible. But are they? If the dollar rallies, then stocks should drop; however, UUP has considerable resistance at its 200-day moving average, and the NYSE Composite has support at its 50-day moving average. A near-term correction in stocks resulting from going over the cliff could set up stocks for an immediate correction and then a strong move up and a breakout in late January.


This week’s AAII sentiment survey appears to support this view. Bearish sentiment -- expectations that stock prices will fall over the next six months -- dropped by 4.5 percentage points to 30.1%. This was the lowest level of pessimism registered by the survey since Aug. 23. Bullish sentiment rose to 43.2%, up 1 percentage point. Since this survey is a contra-indicator, it supports the view that we should expect a correction to occur shortly.


Disappointment over the lack of an agreement on the fiscal cliff by Christmas could result in an immediate sell-off. But there appears to be enough support to hold a decline to no more than 5% to 8%. The New Year may very well bring new highs despite the near-term malaise.


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38Comments
Dec 16, 2012 7:25PM
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Ageed.That Wall Street....Can be a treachous venue...Most of us never learn a lot about investing and saving to plan for our Futures....Should be a couple of semesters in Highschool just for that purpose, using it towards a Degee or an Econ..Future.

 

A lot more Americans are still sitting on sideline cash and getting burned along the way...

More then we think.....And I also understand why...It's hard to make an argument about it..

But there are better ways to save and make money besides CDs..Many should research that fact.

But by the time you pay a FA or Broker....To do that, you may not make your money back..

So there within, lies the conundrum...

A Rock and a Hard Place....??..But Americans have gotten scared and the old and some young are saving more percentage wise then they have in Decades..Also not Great for our Economy.

But we all had the Depression to thank in the 30s and now we have the Big Recession from 2007-2009 Spring to thank for it today...

Dec 16, 2012 12:45PM
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All marketing from the used car lots to Wall st. are CLEVER LIES !  It's always filled with fine print and disclaimers that the average American cannot decipher.  Only those with the decoder key can make sense of the outcome and solve the puzzle. Insider info and billionaire ponzi scheme designers have the edge and always will ! 

America is one big casino and lottery outlet with the house rigging the game !

Q) What's the difference between a Carnie and a Congressman ?

A) The carnie gives you better odds in receiving something for your money!!! 

Dec 16, 2012 7:43AM
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None of that money courses through Main Street. NONE. Like... N... O... N... E.... You can have complete and absolute deflation when NONE OF THE FIAT is doing what it was printed to do. Morons like Mirage want the government to stop spending and for us to eliminate taxes. Consider what that does for us all... NOTHING. Flush the accounts out and get that currency coursing... OR ELSE. A reminder that the President can only do so much without Congress. America is pretty close now to forcing the Pledge Dead Heads out. Progress beats Congress every day and especially on Sundays.
Dec 16, 2012 4:13AM
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The Federal Reserve Banking Cartel will back stop Wall Street and it will go on the backs of the people.
Dec 15, 2012 4:18PM
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Well apparently...Saph500, Is not an investor..

And WHY would you wish all that HARM on the retirees/others that are in the Markets trying to make enough on dividends to supplement other savings and SS....??

The Oldies took it in the backside big time in 2007-2009 early....They need a break.

 

Too bad I can't really tell you, what I would like to say...mIm...

 

Dec 15, 2012 3:02PM
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I wonder about Mitt Romney's secret sauce to create the 12 million jobs. What happened to that? Repeal Obamacare on day 1... no that wasn't it. He had a secret for creating jobs. Well, if Paul Ryan would be so kind as to provide 12 million jobs, I could forgive the fact that he and the other House Republicans are completely useless government bureaucrats bringing down excellent salaries with very enviable benefits packages. I think we should pay lawmakers for performance. I suggest that the people should tie Congressional compensation to job creation and a balanced budget, not to war-mongering, job-exporting, and Wall Street money-worshipping. When Mr. Boehner and Mr. Ryan get down to about $35,000/year household income and they are in hock up to their eyeballs with no job security and no employer-sponsored benefits, I think that would be the time to let them go. As Donald Trump would say, "You're fired"! And smiling smugly.

 

  

Dec 15, 2012 1:18PM
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I hope the market falls 2000 pts ... It needs a good drop ! Its wat to overinflated...
Dec 15, 2012 12:41PM
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Consider this... if you leave your money in the markets and Bernanke continues to create more fiat currency electronically, you are more likely to lose everything. There is ZERO viability to your stocks. It's not a guess, it's historic fact. Almost every publicly traded entity lacks genuine assets, sufficient personnel with skill sets, imports and drop ships, or is pariah taking out of the economy (financials, banks and law firms). If you take your money out of the markets, you will need to know where to put it. We have no choice but to get America re-employed. If the markets collapse, the hired-in execs go with those cardboard platform companies. We are no longer a self-sustaining nation so you can guess where part of it goes. LOOK at Detroit. It incorporated a bunch of small towns to make itself a metropolis that is no longer functional. It will assimilate soon into the sector grids it's sprawl was developed along. Emergency financial paper pushing won't fix it. Likely, it will become the first anti-urban area with a hi-rise downtown, crop lands and condo projects in harmony and rings of dysfunctional suburbia destroyed by bad bank credit. IF things continue to stagnate, we won't worry about taxes but we will have multiple currencies... none of which make stocks or bonds worth anything (counter-recognition). For those of you who are mired wholly in political one-liners and think your assets are tangible, PLEASE take a week off and "rough it". Can you be self-sufficient? If not, know that hyper-inflation from a lack of goods due to our primary currency being compromised won't turn us to a gold standard. If the stores are barren... you starve. Preppers are on the other end, not the default. The entire former Middle Class has had to dig in dumpsters and gained a very valuable education--- most of what is in excess today is worthless. A farm pitch fork that won't pick up hay (tines bend) is worthless. There is likely 100 million of them in warehouses- used to eliminate the American industry that made good tools-- by Wall Street globalization nut cases. You will still need to pitch hay. Someone knew that and is refurbishing the old ones. Expect to pay through the nose because that's what it costs to restore us. Me Generation-- you have a problem... too young to die, too old to be as bold as you are. The fact is-- you liquidated your housing at the peak time, you got free benefits throughout your life and you didn't need an advanced degree to get a decent job. It isn't rocket science, you WILL shoulder the cost to alleviate suppression on modern families. The Fiscal Cliff stalemate will end with the dissolution of the Republican Party. Those who signed the "Pledge" will be condemned for taking us over the edge and serve time for crimes against America. Regardless of that or not... we will STILL be a nation destroyed by GREED and will need to recover. With you or without... the without will be costly. Wake up... we can't wait for more Kool Aid.
Dec 15, 2012 8:26AM
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Do any of you actually believe that the multimillionaires in Washington care about the so called lower or middle class in this country.It is no longer about "what can we  do for our country" but "what can we do for us(the rich)"..Why else would it cost over 500,000,000 dollars to run for president.
Dec 15, 2012 2:15AM
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Scorpion Black...Your ranting was probably better then most I read on here..You may be Right??
Dec 15, 2012 1:21AM
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I wonder what planet Sam is from? Watching currencies and comparing them to the way equities behave on technical charts is a futile exercise. The new FED action is like a company diluting it's shares by issuing more ad infinitum. How would the chart look for a company that did that?  
Dec 14, 2012 11:15PM
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Part of the reason Ben has been printing so much money is to get inflation going.  He is so afraid of deflation that it makes his eyes spin.  Deflation would increase the buying power for every one.  Inflation hurts everyone except the government, who is deep in debt.  
Dec 14, 2012 11:12PM
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There plan it to go off the cliff, and then they all can get together and lower taxes, then everyone will be happy.  
Dec 14, 2012 8:32PM
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Here's an idea to get those do-nothing schmucks in Washington to do something, everybody takes their money out of the market,whatever one you're in, for one day,just one day, then tell those idiots this could happen for  a real long time, just too worried about all of that congressional work that has not been done. Damn, wonder where their kickbacks are going to come from then, whoops,I mean their political donations,they get those year round don't they? Well, we could take their salaries and benefit packages and their cars and drivers and,, well all of that stuff we are paying for, give that to medicare and we slice a little bit off of the problem, oh yea ducktape their mouths shut,a major part of all that hot air causing global warming. Ah, what-the-hell, just ranting,sounded good in my head for a minute...LOL.
Dec 14, 2012 7:56PM
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I WOULD RATHER......Put it this way, SOME stocks are maybe overpriced by 20%

Some are over by 10%....

And many or most are RIGHT PRICED.....Need to go back and do some research...

 

Market correction...??? Could be 10%, possible ?

But I would sooner think 5-7% with a recovery within 30 days....IMO.

 

The SKY is not FALLING.....And DOMESTIC TURKEYS or PIGS can't fly....

No matter what you have read or been told.

Dec 14, 2012 6:20PM
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How far will the market fall?  There's no telling - just too many variables.  You could make a pretty good argument that stocks are way overpriced now - by 20% or more.  Look at Apple, the stock is trading above $500 while their book value is under $130.  McDonald's has a book value at $14, while their stock trades at $88.  Wal-Mart has a book value of $22 and is trading at $69.

There's also no telling how many trillions more Bernanke is willing to pump in to keep up appearances.  Hell, we can't even get an accounting of what he's already bought.  He's spoken several times publicly about equity purchases as a viable option, and it's not unreasonable to think he's already done so.

Then you have the variable that is the fed gov.  It's definitely a plausible scenario that the Repubs lose control of the House in 2014.  That will give Obama and the Dems another 2 years to wreak havoc and there's no telling what might happen then.  There could be another trillion dollar "stimulus" program right around the corner if they get their hands on the checkbook again.  We could easily see the Dow float to 20k while the price of milk hits $8/gallon and the Euro skyrockets to over $2.

The one question we must ask is whether anything substantive was put in place over the last 4 years that actually addressed and solved any of our economic problems.  Or did we just spend the last 4 years slapping paint and wallpaper on the walls of our economy and spraying a bunch of air freshener around the house in hopes that no one notices all the water and termite damage that permeates our entire structure.

Dec 14, 2012 5:15PM
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Let's see

 

Earnings = $246K

Fed + state taxes = 72K

Medical Insurance = 7K

Property Tax = 6K

Sales Tax ???? = California - one of the highest

Fuel taxes ???? = California - the highest in the US

 

2013 - taxes going up

 

House under water and bank refuses to discuss loweing the current 6% Int rate  

 

Gee - can someone tell me at what point I will be paying "enough"

Dec 14, 2012 4:40PM
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any wonder why most of the WH cabinet wants out of DC!

Dec 14, 2012 4:34PM
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les see.........

 

Obamacare tax increases, debt to GDP ratio ever-rising, FED floodgates wide open, Eurofix nowhere to be seen, regulationGATE unchecked......... hmmmm.... recession....hmmm....

 

 S&P= 1050 

Dec 14, 2012 4:22PM
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We are waiting....waiting...waiting...waiti...wai...wa...w..
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