ETFs, Stocks Drop As Fiscal Cliff Approaches

U.S. ETFs and stocks fell yesterday, the day after Christmas, in light Holiday trade as the Fiscal Cliff clock ticked and Christmas shopping looked weak.

The President plans to return to Washington and negotiations with Congress over the Fiscal Cliff are expected to get underway again on Thursday with 5 days remaining to the Fiscal Cliff deadline of December 31st.

Major U.S. ETFs and stock indexes declined with the Dow Jones Industrial Average (DIA) sliding 0.19%, the S&P 500 (SPY) falling 0.48%, the Russell 2000 (IWM) slipping 0.69% and the Nasdaq 100 (QQQ) dropping 0.79%.

The tech sector recently generated several “death cross” sell signals which deepened in yesterday’s action, while other major indexes showed declining momentum and relative strength on a technical basis.

Aside from the Fiscal Cliff dilemma, more interest is now being focused on the all important consumer and retail sales which apparently were lackluster over the Christmas holiday. Holiday sales appear to have climbed 2% versus 6% last year and some reports show the lowest rate of gain in holiday sales since 2008. Retail ETFs were hit hard by the news with SPDR S&P Retail Index ETF (XRT) dropping 1.74% on the day.

Oil (USO) gained 2.5% to $90.98/bbl and gold (GLD) gained 0.10% to $1660.70/oz.

To further complicate the Fiscal Cliff problems, U.S. Treasury Secretary Tim Geithner said that the U.S. will reach the Federal debt ceiling by the end of December and will introduce various accounting measures to delay a break above the mandated ceiling. Known as “headroom,” Geithner didn’t say how long the additional $200 billion he was going to create would last, but most estimates are in the range of two months, delaying the debt ceiling breach until February.

Congress has to approve the debt ceiling limit and many observers expect the House to tie the Fiscal Cliff negotiations to the debt ceiling debate to increase Republican leverage in Congress against the White House. The Fiscal Cliff was created when the last debt ceiling debate gridlocked in the summer of 2011 and triggered a stock market decline of more than 15%.

Economic reports were light yesterday with the Case-Shiller index declining 0.1% in October but still pointing towards a long-term recovery. Prices fell most in Chicago and New York while hard-hit Las Vegas and Phoenix showed solid gains on a monthly and yearly basis, with prices in Phoenix up more than 20% over the last year.

Today brings reports on weekly jobless claims, consumer confidence and new home sales.

Bottom line: Stocks continue declining as Fiscal Cliff fears grow. Now Monday’s debt ceiling deadline adds to tensions as politicians continue wrangling over competing solutions for the Fiscal Cliff. Expect major U.S. indexes and ETFs to react negatively if solutions to these twin problems aren’t found.

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