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Stocks Slump on Budget Talk Worries

"While talks are ongoing, we would not expect serious negotiations to begin for another couple of weeks. In the interim, headlines out of Washington are likely to be mixed, but we would expect more negative than positive news until at least mid-December," the firm's economists noted.

Organization for Economic Cooperation and Development's Secretary-General Angel Gurría warned Tuesday that the if the United States falls over the fiscal cliff, it could tip an already weak economy into recession, while failure to solve the euro area crisis could lead to a major "financial shock and global downturn."

Meantime, most of Tuesday's economic data was positive. The Census Bureau reported durable goods orders were unchanged in October after a prior downwardly revised gain of 9.2% in September. Excluding the transportation component, orders rose 1.5%, compared with a downwardly revised increase of 1.7% the previous month.

Economists, on average, had expected orders to fall 0.6% in October and decline 0.5%, excluding transportation.

"Overall sales had been hampered by the impact of the recession gripping the eurozone while of course fears over what is on the other side of the fiscal cliff," said Andrew Wilkinson, chief economic strategist at Miller Tabak. "The report appears pretty encouraging given the nature of the rebound in orders outside of the transport sector, while demand for capital goods also surged. The minor downwards revisions will likely be overlooked in the face of strengthening orders in September."

The S&P Case-Shiller 20-city home price index showed a gain of 3% year over year in September after the prior month's rise of 2%. Economists were expecting a 2.9% year-on-year increase in September.

The Federal Housing Finance Agency's September housing price index, meanwhile, rose 0.2% in September after a downwardly revised 0.5% increase in August.

Brian Peery, co-portfolio manager at Hennessy Funds believes that homebuilder and homebuilder supplier-related stocks are an attractive class of assets right now, with the housing market continuing to serve as a bright spot in the stock market.

"We think that the Fed with their QE3 has really been saying to the marketplace that they're focusing on the homebuilders, they're focusing on keeping a low mortgage rate environment and really spurring those first-time homebuyers, and maybe on some people who've done some deferred maintenance on their houses to create a wealth effect by getting the housing prices up and making the consumer feel good again without spending," said Peery.

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