Stock Market Fears Resume Over Fiscal Cliff

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ETFs and stocks continue waterfall descent due to fiscal cliff and European worries.

U.S. ETFs and stocks fell further yesterday as fears over the fiscal cliff ratcheted higher and Europe continued to simmer.

Investors also adjusted to the reality that the election made no changes to the political landscape and so the same parties that were unable to resolve the budget deficit in the summer of 2011 now have less than two months to solve the same problem again.

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All of this comes upon the end of a lackluster earnings season and deep problems in tech-land (NYSEARCA:QQQ) with Apple Computer (NASDAQ:AAPL) in a bear market, more than 20% below recent highs, while the Nasdaq 100 (NYSEARCA:QQQ) is down approximately 10% from recent highs and so in correction territory.

But the big worry is the fiscal cliff with its more than $500 billion in spending cuts and tax hikes that will automatically occur on December 31st if Congress should not take action before then.  Analysts suggest the most likely scenario is for the lame duck Congress to kick the can into 2013 but that is not certain and less certain is how markets will react to more gridlock and lack of compromise.

Meanwhile, European ETFs had a meager day as Germany reported poor economic news and the European Union delayed their planned bailout of Greece in spite of the country’s Parliament passing a highly unpopular austerity plan on Wednesday.

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So now the S&P 500 (NYSEARCA:SPY) has dropped 2.8% since Monday’s close while the Dow Jones Industrial Average (NYSEARCA:DIA) has dropped 300 points or 2.3%.  While not large in percentage terms, the recent correction did drop through significant support levels that were at 1400 on the S&P 500 (NYSEARCA:SPY) and 13,000 on the Dow Jones Industrials (NYSEARCA:DIA) and so these now become resistance levels should the major U.S. ETFs attempt to resume a climb higher.

On the good news side of things, weekly jobless claims declined and the traded deficit contracted.

Major U.S. Index ETFs

Dow Jones Industrial Average (NYSEARCA:DIA) -0.94%

S&P 500 (NYSEARCA:SPY) -1.2%

Nasdaq 100 (NYSEARCA:QQQ) -1.5%

Russell 2000 (NYSEARCA:IWM) -1.35%

Gold (NYSEARCA:GLD) +0.83%

Oil (NYSEARCA:USO) +0.5%

United States 30+ Year Treasury Bond (NYSEARCA:TLT) +1.48%

Friday comes the University of Michigan consumer sentiment report.

Bottom line:  A sharp, post-election sell off continues as markets adjust to the new but unchanged political landscape and what it might mean for major issues like the fiscal cliff and deficit reduction plans.  Investors and voters are looking for some movement towards a settlement of these big problems and failure by Congress and the President is likely to be punished in no uncertain terms.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.

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