SAN DIEGO (ETFguide.com) According to various news
reports, the 'super committee' has shifted its focus from
discussing deficit reduction options to how to best admit their
failure to reach a conclusion.
Why can't the 12 members of the Deficit Super Committee agree on
the needed cuts? Perhaps the 12 egos are even bigger than the
actual deficit, or there's just no solution if 12 'smart' committee
members can't solve the problem.
The bigger question for investors is how stocks will react to
their expected failure? Look at today's ticker and you may be
reminded of August when Congress almost failed to solve the
A last minute deal in August averted a government shutdown but
advertised the government's inability to manage its finance to the
entire world. S&P withdrew the coveted AAA rating and stocks
tumbled relentlessly for days.
How Big is the Deficit Problem?
The super committee was created by the Budget Control Act of
2011 on August 2, with the assignment to identify ways to reduce
the deficit by at least $1.2 trillion over ten years.
To put this 'massive' task into perspective consider this: The
2011 federal budget is $3.7 trillion. I know the budget is fluid,
but let's just multiply 3.7 by ten to get the full ten-year scope -
$37 trillion. The committee's job is to eliminate $1.2 of $37
trillion -that's 3.2%.
How many American households have had to deal with a 3.2% income
reduction (or better who hasn't)? Assuming a family makes $5,000
per month it would have to find a way to cut $160. If families can
do it, why can't Congress?
The Big, Fat, Ugly Ripple Effect
It's easy (and probably correct) to point fingers at Congress
for creating a financial stalemate, but the sad reality is that
America's 'average Joes' will end up paying for it (financially and
The government has become a huge part of the U.S. economy and
accounts for nearly 40% of Gross Domestic Product (
The first chart below shows how the government has become more
and more intertwined with the U.S. economy.
The second chart illustrates how the government's share of GDP
has outmuscled (and probably stifled) the private share of GDP.
The third chart is an outright admission of failure. It plots
government expenditures (including QE) against the only thing that
matters - unemployment and the stock market (charts courtesy of the
November 2011 ETF Profit Strategy Newsletter).
>> click here
to view charts
In addition to damaging the domestic stock market (NYSEArca:
VTI), a failure of the super committee has the very real threat of
de-railing global markets (NYSEArca: EFA), which include emerging
markets (NYSEArca: EEM) and already weak European stocks (NYSEArca:
VGK). The U.S. won't recover without the help of its international
It's A Lose-Lose Situation
If the super committee fails to come up with a deficit reduction
plan before the deadline, the so-called 'trigger' will be
activated; resulting in $1.2 trillion worth of deficit reduction
measures and the world will once again see how ineffective U.S.
Regardless of how the deficit is reduced, there are only two
possibilities: 1) Increase taxes and 2) Decrease spending. Pick
your poison, either will 'kill' the economy along with the Dow
(DJI: ^DJI), S&P (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC) and
Russell 2000 (NYSEArca: IWM).
Tune In to the Noise That Matters
I usually trust my technicals and don't make or recommend making
investment decisions based on news events. But I can't help but
noticing everything that's going on.
- The super committee deadline is approaching.
- The perception about the eurozone debacle is moving away from
denial towards a realistic assessment. Needless to say, the
realistic assessment is bleak.
- The S&P is in the initial stages of a giant head-and
shoulders or M-pattern decline.
- Dividends are close to an all-time low (a sign of
Putting the Decline Into Perspective
Today's decline is a small piece of the puzzle that fits
perfectly in the larger mosaic. The stock market has adhered to a
well-defined roadmap outlined by a composite of
As per the roadmap, the ETF Profit Strategy Newsletter expected
a major market top in April/May 2010. Below is an excerpt from the
April 3 ETF Profit Strategy update:
'Even though odds do not favor bearish bets the first half of
April, I believe a major market top is forming. The S&P is
forming a giant head-and shoulders top where the down sloping upper
trend line runs parallel to the trend line that connects the
October 2002 and March 2009 lows. For the month of April this trend
line will traverse through 1,377. The 78.6% Fibonacci retracement
is at 1,381.5. There is a fairly strong Fibonacci projection
resistance at 1,369. In terms of resistance levels, the 1,369 -
1,382 range is a strong candidate for a reversal of potentially
Just a few trading days before the October low, the September 23
ETF Profit Strategy Newsletter predicted that: 'From its May high
at 1,370 to its eventual low, the S&P will likely have lost
about 300 points (22%). This kind of move validates a counter trend
rally. The plan is to square short positions and buy long positions
in around S&P 1,088. The rally, once underway, will probably
re-inspire a certain degree of confidence into the market before it
runs out of steam. The most likely target for this rally is S&P
1,266 - 1,282.'
Why Change A Winning Formula
As soon as the 1,266 - 1,282 target was met the rally stalled
and stocks turned back down again. The Newsletter recommended to go
short at 1,270, temporarily took profits at 1,235 (to allow for a
potential bullish triangle formation) and as per yesterday's update
went short at 1,205.
When it comes to market forecasting there is always room for
error, but as long as the market adheres to a reliable forecasting
formula there is no reason to abandon it. According to the formula
the down side potential is simply massive.
Profit Strategy Newsletter
provides a short, mid and long-term outlook along with
easy-to-follow buy/sell recommendations.