Investor Education: Euphoria Wears Off, Market Reality Hits

The markets surged dramatically higher last week, following the avoidance of the catastrophic Fiscal Cliff. A deal was struck in Washington D.C. to keep taxes the same on individuals making less than $400,000 and families making less than $450,000. The SPDR S&P 500 ETF Trust (SPY) had its best week in over a year and the average investor and media breathed a sigh of relief.

While last week it seemed as if the world was saved, this week the market is on pace to have its second down day in a row. The SPY is trading at $145.32, -0.60 (-0.41%). So why is the market beginning to sell after such great news last week? There are multiple reasons which will be explained below.

1. The market had a dramatic move to the upside of around 5%. It is common see a pull back after such a big move up.

2. The Fiscal Cliff deal struck in Congress only dealt with the tax side. The spending cuts were kicked two months down the line. The spending cuts are arguably the bigger factor to the market as they will influence future growth dramatically.

3. The U.S. will hit the debt ceiling in two months. This means the United States will default on the debt if the ceiling is not raised. A major battle is brewing between Republicans and the President. The Republicans are going to be demanding huge spending cuts if they are to vote in favor of increasing the debt ceiling. This will likely be the final stand and even more important to the stock market. Remember, if the debt ceiling is not raised, the most powerful country in the world would default on its debt.

4. The Federal Reserve has signaled they may stop printing money by the end of 2013. The QE policies of the Federal Reserve have arguably inflated the stock market for the last four years. Think of this as a drug addict (the stock market) that is addicted to drugs (QE). As the year progresses, this will become more and more of a worry to the markets.

The bottom line is this: it appears more and more that the pop from last week may be short lived. It is very possible we could see more downside as the second Fiscal Cliff nears. I am looking to short charts that have PPT Strategy setups in them.

Related: SPDR Dow Jones Industrial Average ETF (DIA) and PowerShares QQQ Trust, Series 1 (ETF) (QQQ).