Santa Claus Takes Up Cliff Diving

NEW YORK ( TheStreet) -- I may have the contrarian opinion on impact of fiscal cliff, but the stalemate in Washington has ended the Santa Claus rally that began from the market lows of Nov. 16.

Strength from Nov. 16 into Dec. 18 can be attributed to the anticipation that a deal to prevent the fiscal cliff could be reached so that Santa would not be forced to take up cliff diving. Today the odds of getting a meaningful compromise have declined significantly and in my judgment a cliff deal that simply kicks the can down the road is not what investors, businesses and consumers are looking for. Going off the cliff is not priced into the stock market, and a weak compromise deal has already been priced into recent market strength.

Going off the cliff establishes the discipline forced by the Budget Control Act that takes effect as 2013 begins. This law calls for across-the board spending cuts to many discretionary programs, and specifies that the Bush-era tax cuts expire. In my judgment, a stock market sell-off would be healthy given overvalued fundamentals and deteriorating technicals. I would not be surprised by significant market downside similar to the bear market seen at the end of 2008 going into March 2009, but not that severe.

On Thursday we learned that consumers on Main Street agree with my way of thinking. The Conference Board's reading on Consumer Confidence plunged to 65.1 in December from a downward revised 71.5 in November on worries about the fiscal cliff. This puts the index significantly below the 90 to 110 neutral zone you can observe on the chart provided by dshort.com -- Advisor Perspectives .

Today's weekly closes and Monday's year end closes set the stage for the risk/reward parameters for 2013. The keys today are weekly closes relative to the five-week modified moving averages, the most important being 13,106 Dow Industrials, 1415.1 S&P 500 and 2991 on the Nasdaq.

Monday's year end closes for the U.S. capital markets are inputs to my proprietary analytics for calculations of new monthly, quarterly, semiannual and annual value levels, pivots and risky levels. For equities it appears that the downside risks presented by my new levels will exceed the upside potential for equities regardless of the fiscal cliff and ultra loose monetary policy.

Analysis of the Yield on the 10-Year Treasury Note (1.723%): As we approach year end, the 10-year yield is just above the five-week MMA at 1.687% and on the cusp of the five-month MMA at 1.725%. Odds favor a continued low yield trading range leaving the 2012 range in tact in 2013. (2.399% to 1.377%).

Analysis of Comex Gold ($1,664.5): The weekly chart favors lower gold prices with the five-week MMA at $1,703.9. The monthly chart is neutral with the five-month MMA at $1,687.3. I do not expect a new all-time high in 2013 versus the 2011 high at $1,923.7. The low end of the trading range should be the 2011 low at $1,523.9.

Analysis of Nymex Crude Oil ($91.13): The weekly chart is positive with the five-week MMA at $88.08 and the 200-week Simple Moving Average at $84.50. The 200-week has been a magnet since mid-2009. The monthly chart has been negative since September with the 120-month SMA at $70.51 and the five-month MMA at $91.56. The 2013 trading range should be within the 2012 range of $77.28 to $110.55 which was within the 2011 range of $74.95 to $114.83, well below the July 2008 all-time high at $147.27.

Analysis of the Euro vs. the Dollar (1.3241): The weekly chart is positive with the five-week MMA at 1.2991 and the 200-week SMA at 1.3523. The monthly chart is positive with the 120-month SMA at 1.3149 and the five-month MMA at 1.2920. There is a three year trading range between the June 2010 low at 1.1880 and the May 2011 high at 1.4941.

Analysis of the Dow Industrial Average (13,096.31): The weekly chart shifts to neutral from positive with a close today below the five-week MMA at 13,106 with downside risk to the 200-week SMA at 11,253. The monthly chart shifts to negative from positive but overbought with a close on Monday below the five-month MMA at 12,973. The downside risk is to the 120-month SMA at 11,034. I do not expect the Dow to return to its October 2007 high at 14,198.10 in 2013, which limits the upside potential.

Analysis of the S&P 500 (1418.10): The weekly chart shifts to neutral from positive with a close today below the five-week MMA at 1415.1 with downside risk to the 200-week SMA at 1198.9. The monthly chart stays positive but overbought with a close on Monday above the five-month MMA at 1387.8. The downside risk is to the 120-month SMA at 1206.6. I do not expect the S&P to return to its October 2007 high at 1576.09 in 2013, which limits the upside potential.

Analysis of the Nasdaq (2985.91): The weekly chart shifts to neutral from positive with a close today below the five-week MMA at 2991 with downside risk to the 200-week SMA at 2500. The monthly chart shifts to negative from positive but overbought with a close on Monday below the five-month MMA at 2973. The downside risk is to the 120-month SMA at 2264. The September 2012 high at 3196.93 should be the upside barrier in 2013.

Analysis of the Nasdaq 100 (2632.94): The weekly chart shifts to neutral from positive with a close today below the five-week MMA at 2656 with downside risk to the 200-week SMA at 2132. The monthly chart shifts to negative from positive but overbought with a close Monday below the five-month MMA at 2645. The downside risk is to the 120-month SMA at 1797. The September 2012 high at 2878.38 should be the upside barrier in 2013.

Analysis of the Dow Transportation Average (5265.70): The weekly chart stays positive with a close today above the five-week MMA at 5138 with the 200-week SMA at 4561. The monthly chart stays neutral with a close on Monday above the five-month MMA at 5079. The 120-month SMA is 4155. Dow Transports set its all-time high at 5627.85 in July 2011, which should be a barrier in 2013.

Analysis of the Russell 2000 (837.40): The weekly stays positive with a close today above the five-week MMA at 822.39. The 200-week SMA is at 703.49. The monthly chart stays neutral with a close Monday above the five-month MMA at 808.66. The 120-month SMA is at 667.01. There appears to be a double-top at 868.57 set in May 2011 and 868.50 set Sept. 14, 2012.

Analysis of the PHLX Semiconductor Sector Index ( SOXX) (379.55): The weekly chart shifts to neutral from positive with a close today below the five-week MMA at 377.44 with downside risk to the 200-week SMA at 363.26. The monthly chart stays negative with a close Monday below the five-month MMA at 384.32. The SOX is below its 120-month SMA at 398.41. The SOX has seen lower highs since the July 2007 high at 549.39. The Feb 2011 high was 474.33 and the March 2012 high was 444.96.

At the time of publication the author held no positions in any of the stocks mentioned.

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.