Making Money Alert: The S&P 500 Hasn’t Reached Escape Velocity Yet

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A week has passed since our last Alert, and there really hasn’t been much of a change in what has been the dominant factor in the markets — and that is the fiscal cliff. By now, you are probably sick of the whole fiscal cliff thing. I know I certainly am. But despite the ill feelings we may harbor about the incompetence and the lack of ability to get things done in Washington, I fear we will have to endure more uncertainty on the fiscal cliff until a deal of some sort finally is reached.

Of course, that deal will likely come with higher taxes on the wealthiest Americans, as many Republican leaders — and of course President Obama — seem to think that what the country needs is more revenue siphoned away from the most successful. I don’t see how that will make an economy grow. But hey, it wouldn’t be the first time politicians ignored the laws of economics.

As for trading action during the past week, we saw stocks jump in the post-Thanksgiving session on what traditionally has been seasonal optimism. Reports of strong Black Friday and Cyber Monday shopping also caused investors to add to positions. Still, the main issue is the fiscal cliff. Until that uncertainty is resolved, look for nervous trading to take place throughout the equity markets.

Technically speaking, the S&P 500 has managed a nice comeback off of the post-election sell-off, but the broad measure of the market remains below its short-term, 50-day moving average.

I am of the opinion that the S&P 500 hasn’t achieved escape velocity yet. By that, I mean that until we see a decisive move above the resistance around the 1,425 level, we aren’t likely to see stocks move into year-end rally mode. If, however, we do get a quick deal on the fiscal cliff (highly unlikely), it could lead to the seasonal appearance of the so-called Santa Claus rally.

Now, there was one piece of positive data we received on Tuesday, and that was on the consumer confidence front. According to the Conference Board, consumer confidence rose in November to its best reading in more than four years. That was read by many observers as a positive sign for stocks, but keep in mind that this indicator is a lagging one. That situation means that it only tells us what people felt about things last month and not what they think about things in the future.

MarketWatch columnist Mark Hulbert wrote what I thought was an excellent piece today that explained how consumer confidence actually is a contrarian indicator, and that the market tends to do better following big drops in consumer confidence than after particularly big jumps.

Of course, I think I would rather see confidence on the part of consumers higher rather than lower, but the bottom line here is we can’t rely on a positive confidence number to give us the notion that stocks are going to climb. It just doesn’t work that way.

The Wisdom of Nabokov

“The breaking of a wave cannot explain the whole sea.”

–Vladimir Nabokov

The great novelist eloquently tells us that you cannot just look at one incident or one example of something if you want to understand the entire picture. For complete understanding, you have to study and examine a lot more of the whole. This situation is particularly true when it comes to the markets and investing. If you really want success, then read, study and look at a lot of source material. Doing so will give you a much better sense of how things work, and it will allow you to explain “the whole sea.”

To read my e-letter from last week, please click here.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To the best within us,

Happy Thanksgiving,

Doug Fabian