NEW YORK ( TheStreet) -- Stocks are hanging on to the fiscal cliff as investors and traders buy stocks in anticipation of the announcement of quantitative easing four when the FOMC meeting ends today.
QE4 is expected to be additional purchases of longer-dated U.S. Treasuries in yet another expansion of the Federal Reserve balance sheet, not an extension of operation twist.
I covered the announcement of QE3 on Sept. 14 with
Bernanke Does the Expected and Then Some
. I then noted that the major equity averages were overbought technically, and that stocks were overvalued fundamentally. I viewed the stock market as speculative.
Fast forward to Nov. 16 when I wrote,
Go Over the Cliff? May Be Best Thing
Then on Nov. 19, I wrote,
Stocks Set to Bungee from Fiscal Cliff
where I correctly called for the beginning a Santa Claus rally.
After QE3 was announced Sept. 13, the S&P 500 peaked at 1474.51 on Sept. 14. The Nasdaq continued higher to a peak at 3196.93 on Sept. 21. The Dow Industrial Average did not peak until Oct. 5 at 13,661.87.
Stocks declined from these dates into Nov. 16 as the focus shifted from QE3 to the risk that Congress and the president will allow the U.S. economy to fall off the fiscal cliff. Stocks turned on a dime on Nov. 16 on the prospects that House Republicans and the president would be able to forge a compromise.
Since then stocks have bungeed higher despite the continued cliff hanging stalemate, as the focus shifted to prospect that the FOMC will announce QE4 today. After the markets complete their reaction to QE4, the focus will shift back to the cliff. It appears to me that stocks may have set reaction high on Tuesday ending the first bungee rebound from the Nov. 16 lows.
It appears that both sides of the aisle can benefit politically by allowing the economy to fall off the fiscal cliff.
President Obama will get his way on raising taxes on those making more than $250,000. After the dive off the cliff his focus will be on re-instating the lower tax rates retroactively for the middle class. To get there he will have to agree on maintaining at least the equivalent in savings on the spending side.