By Peter Switzer, Switzer Super Report
The S&P 500 is now below an important testing level of 1,420; it's sitting on 1,412, which should have some resistance, but if it falls, 1,400 is the next big one. So are we in the calm before the storm?
I think we could see 1,400 breached because US company reporting season hasn't come in as we hoped ? that is, better than expected. Instead, it has come in as you would have expected given the terrible run of economic data we saw over the September quarter.
Also remember that both the European Central Bank (ECB) and the US Federal Reserve have increased their money supplies and they did this because they were worried about their economies.
Since then, my reading of both economic results and stock market movements all suggest that we are heading in the right direction, provided it's not towards this US fiscal cliff!
The main threat
Congress needs to agree on new fiscal measures as the country once again reaches its debt ceiling. If this can't be done, automatic tax hikes and spending cuts will kick in, which is something the economy isn't ready for.
I really don't like resting my market forecasts on the logical behaviour of Americans and especially those who populate the US Congress. I'm hoping like hell that whoever wins the US election will have a Congress that supports him. If we get a stalemate like we saw in August and September last year, we could see a 20% slide in stocks.
This means the US election is really important for our portfolios. Let's be optimists and imagine the poll goes our way and the new president and Congress can negotiate some softer fiscal measures to reduce the budget deficit and the country's towering debt; stocks will head up. However, if the reverse happens, stocks will fall from the outset after the election if it's perceived that a stalemate is coming.
Even if an outcome results before New Year, which is when the fiscal cliff would be triggered, the market would still give up plenty ahead of a resurgence in stocks triggered by an agreement.
With Cup Day looming, I'm a betting man. Regular readers know I started talking up stocks as soon as China promised to start spending big after Lehman Brothers failed. Since 9 March 2009, stocks have been the place to be, despite their average performance.
The punting strategy has been to buy good quality stocks that pay great dividends and to buy in the dips. I wouldn't change that strategy, but I would prefer if I didn't have to endure another 20% crash in stocks.
With Spain getting close to asking for a bailout and China showing it is on the improve, all we need now is the Americans to behave like rational, intelligent citizens of the world and we could be off to the races next year!
Gee, I hope that's not asking too much.
P.S. If you want proof of an improving China, the HSBC Flash Manufacturing PMI reading, while in shrinking mode for 12th months in a row in October, showed that actual output was at a three-month high. Better still, order books were the best they have been since April! This is a great sign of a recovering Chinese economy.