So Obama won the election...four more years...of what?

We don't know. But if it's anything like the last four it will be full of meaningless sound bites, lies, trillion dollar deficits, and probably more bank bailouts. There was something genuinely depressing about the whole US election thing.

As far as we could tell from the limited and purposefully ignorant view we had of the election, Obama won because he was more personable than Romney. Simple as that...the bloke with a more human-looking face won. Policies? Mwah...

The stock market certainly didn't think much of Obama's win. The Dow Jones Industrials Index and the S&P500 both dived nearly 2.4% overnight. Why such an about face? It wasn't like Obama's victory was unexpected. And the Aussie stock market, in all its naïve bullishness, even rallied yesterday as news of Obama's second term broke.

Here's the reason Bloomberg gave for the sell-off:


'U.S. stocks fell, driving the Standard & Poor's 500 Index toward the biggest decline since June, as investor focus turned to the budget debate and Europe's debt crisis following President Barack Obama's re-election.'

Oh, OK then. So this huge sophisticated machine that is the stock market decided to only focus on the election in the past few months...buying stocks with the aggression of a blind rabid dog, while choosing to ignore the looming issues of a potentially severe fiscal contraction in the US as well as an ever worsening situation in Greece.

Right.

But apparently the morning after the election, 'the market' is now ready to focus on these issues. We humans are (mostly) an inquisitive bunch, so wanting to know 'why' the stock market moved up or down for the day is a natural tendency. But for investors the daily 'why' is pointless. It will just cloud your judgment.

In fact, that's the whole point of the stock market. The whole operation is an emotional torturer designed to cloud your judgement...to suck you in right at the worst possible time and drag you out right at the bottom. Eventually, you're left so emotionally beaten you'll want nothing to do with it...'until things start to look better again...'

So why did the stock market sell-off in such a hurry last night? Well, it's been on the cards for a while. The S&P500 peaked on the day of Bernanke's QE to insanity announcement...on the day we remember many 'experts' saying it was time to buy stocks. But it's been a downward grind for the index since early September.

If you're a subscriber to Slipstream Trader Murray Dawes, or followed his recent warnings in Money Morning, this sell-off hasn't come as a surprise. We asked Murray what he made of the overnight action, and where we should be looking for the index to go to from here...


'Last night's price action in the States has now confirmed the false break of April's high of 1422. A 48 point range from high to low (that occurred in last night's trading action) in the E mini S+P 500 futures is a huge range and it was on good volume. There is a real possibility the stock market could start to cascade to the downside from here for the next week or so. The first target is of course the 200 day moving average, which sits at 1380 (the red line in the chart below). That is only a couple of per cent below here so we can get there in one night's trading. If the 200 day doesn't hold that's when panic will start to set in. We could see the S+P 500 fall 100 points in a matter of days if that occurs.

'It is still early days to be making those predictions, but from here the dominoes are in line.

'The key level to watch in the ASX 200 is 4448. That is the high from May 2012. A weekly close below this level will give me targets towards the Point of control of the distribution from the past year of 4200, and potentially below.'

S&P500 - Beginning to Crack

Click to enlarge

Source: StockCharts


The bottom line is the US is doomed no matter which way you look at it. A show of fiscal restraint now (raising taxes and cutting spending) would almost guarantee a recession. On the other hand, more trillion dollar deficits will just freak the market out about the eventual adjustment needed to get US finances in order.

That this 'fiscal cliff' issue will now become the media's plaything seems assured, for the next few months at least.

Regards,

Greg Canavan
for The Daily Reckoning Australia