Go Over the Cliff? May Be Best Thing

NEW YORK (TheStreet) -- This year's stock market strength was caused by the continued anticipation of additional Federal Reserve Quantitative Easing programs. When it came to QE3 I thought the market had rallied too far too fast and opined that this anticipation was factored in by mid-September.

To me it was a case of buy in anticipation, sell on the news. QE3 was announced on Sept. 13, and most stocks, ETFs and equity averages peaked between Sept. 14 and Sept. 21.

As the stock market began to become infected with "QE fatigue", the focus shifted to the pending "fiscal cliff". On Election Day stocks had a strong rally in anticipation that Mitt Romney would pull out a victory, but when President Obama won a second term stocks took it on the chin and "QE fatigue" became an epidemic. With this week's weakness and market concerns around the world this epidemic has become a pandemic.

All major equity averages and all sector ETFs I track have negative weekly chart profiles. Without any safe sectors the epidemic of "QE Fatigue" can be justifiably called a pandemic, as there are no safe havens in the equity markets.

The background to the "fiscal cliff" began with the Budget Control Act, which became law because of the partisan stalemate in Washington, DC. Democrats and Republicans could not agree on how to cut the budget deficit. This law calls for across-the-board spending cuts, "sequestration" to most discretionary programs. In addition, the law specifies the Bush-era tax cuts expire as 2013 begins.

President Obama wants the tax cuts to end for families making more than $250,000 per year, or $200,000 for individuals. The House Republicans do not want any tax rate hikes but seek to overhaul the entire tax code. If the Republicans agree to keep middle-class tax rates unchanged and raise those on the so-called wealthy, they lose their bargaining chip.

In my opinion, the Budget Control Act was the country's insurance policy that America would take action to reduce the uncontrollable budget deficit and growing debt. It's the act that forces austerity.

Between now and year-end there seems to be no chance of achieving a Grand Bargain, so let the "Fiscal Cliff" happen. The aftereffects should result in bringing together both sides of the aisle. By the time 2013 begins, stock market weakness could be factored in as stocks are already falling off their technical cliffs.

Stocks are now declining in anticipation that the "Fiscal Cliff" will happen. Investors are selling shares now to book profits to prevent the differential costs associated with increased taxes on capital gains and dividend income the potential in 2013. This should give the stock market a strong bid as 2013 begins as investors buy back those shares sold since mid-September.

Sure the economy may suffer a double-dip recession, but this fiscal discipline is better than continuing to kick the can down the road as the deficit grows and debt piles up.

Overall the fundamentals are neutral at best according to www.ValuEngine.com. We now show that 72.1% of all stocks are undervalued due to share-price declines and with the yield on the 30-Year U.S. Treasury bond stuck at my semiannual pivot at 2.730%.

In terms of sector valuations, there is now a balance with eight sectors undervalued and eight sectors overvalued. Stocks are up over the past 12 months in eight sectors and down in eight sectors. Overall price-to-earnings ratios are above 20.0 in eleven sectors, not a positive metric.

The technicals have been deteriorating as the main symptom of "QE Fatigue," which I described as an epidemic last week. With all major equity averages having negative weekly chart profiles, the epidemic has become a pandemic.

My nearest value levels are 12,312 on the Dow Industrial Average and 2698 on the Nasdaq. A ray of hope for stability during Thanksgiving week would be a weekly close above my annual pivot at 1363.2 on the S&P 500, which has been a magnet all year long.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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