'Cliff'-Watching Investors to Put Buying on Hold

A flurry of Fed speakers will probably not be enough to distract traders from their obsession with the "fiscal cliff" Thursday.

Hedge Funds Cite 'Fiscal Cliff' as Top Concern: Survey
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A myriad of worries weighed on stocks Wednesday, including Europe and the Middle East, but the selling accelerated when President Barack Obama spoke at a media briefing about upcoming fiscal cliff negotiations.

He restated his views on the need for higher taxes and again asked Congress to immediately extend middle class tax cuts. That would leave a whole package of issues, including how to tax the rich, unresolved and up for discussion.

(Read More: 'Cliff' Deal Could Spark Rally: Citi Strategist)

"Every time Obama speaks the market goes down because they're worried about the contentiousness of the negotiations," said Peter Boockvar, market strategist at Miller Tabak. "They seem to be intent with threatening the U.S. economy with a recession, just so they can raise taxes on the top two percent."

Boockvar said he is also watching Europe, where Spain's 10-year bond yield continues to edge toward 6 percent, and Greece also remains a worry. In Spain Wednesday, police and protesters clashed, as they did in Italy. Millions of workers went on strike across Europe, protesting austerity programs.

The Dow fell 185 points to 12,570 Wednesday, and the S&P 500, dropped 19 to 1355.

"There's no real buying that's going to step in front of knowing whether we're going off the fiscal cliff," said Andrew Stein, head of equities trading at Cowen. "Until people get a firm grip on that, they're trading around positions, not actively creating new positions."

"This is a buyers' strike until they can figure out what's going on in Washington," he said. President Obama meets with Congressional leaders Friday to begin discussions on resolving the fiscal cliff, and the concern is the discussions will quickly become contentious.

The fiscal cliff is the $600 billion in tax cuts and spending cuts that would slam the economy, starting in January, if Congress and the White House don't come to an agreement on what to cut and how to tax.

(Read More: Fiscal Cliff: America's Looming Economic Crisis)

Traders said it is the overriding concern for markets, and some investors have been taking capital gains to get ahead of the higher taxes expected next year. "There are so many different variables out there that are forcing you to sell. The bears would say it's healthy profit-taking," said one trader. The fiscal cliff is the biggest factor. "At the end of the day, that's what the chatter is all about – it's taxes."

On Thursday, there are five Fed speakers, including Fed Chairman Ben Bernanke who speaks on housing at 1:20 p.m. ET. There is also some important data, especially the Philadelphia Fed survey and Empire State survey, both of which could show the impact of Super Storm Sandy on the east coast region. The storm's impact may also show up in weekly jobless claims, reported at 8:30 a.m. CPI is reported at 8:30 a.m.

Sandy impact may also show up in the earnings and comments from Wal-Mart and Target, which both report before the opening bell Thursday. Other companies reporting include Dollar Tree , Ross Stores , Viacom , Gamestop, and Helmerich and Payne . Companies reporting after the bell include Applied Materials , Autodesk , Dell , Gap, and Intuit .

Europe will stay a focus Thursday when EU authorities report GDP early Thursday. Germany and France also report third quarter GDP.

QE and Cliff-Watching

The Fed Wednesday released the minutes of its October meeting, when it had agreed to launch its third round of quantitative easing, or QE3. The market shrugged off what looked like a desire by some Fed officials to expand quantitative easing when its Operation Twist program expires at year end. Other officials questioned the effectiveness of the current purchasesand whether they would be needed. The Fed's QE3 program involves the outright purchases of $40 billion a month in mortgage securities.

The minutes from the meeting said "a number of participants" indicated that additional asset purchases would probably be appropriate next year. The Fed is expected to review its asset purchases at its December meeting. Twist involves the purchase of longer-term Treasurys and sale of the same amount of shorter-term Treasurys.

"I think they really did have the current environment and the uncertainty the fiscal cliff brings, in mind at the time," said Zane Brown, fixed income strategist at Lord Abbett.

(Read More: How 'Cliff' Could Affect Mortgage Interest Deduction)

The 10-year yield was slightly lower at 1.58 percent Wednesday. But traders have been eyeing the high-yield bond market, which has been outperforming for months. The Barclays Capital High Yield Bond ETF (JNK) sold off on above average volume Tuesday, along with stocks.

"It might be selling off on the margin," said Brown, of the high yield market. He said the spreads were widening on the very lowest quality securities. "I think you're seeing spreads widen out because of the decline in the yield of governments…(higher quality) High yield bonds are holding up pretty well," he said.

Oil prices rose Wednesday as traders watched headlines on Israel's assassination of a top Hamas military commander in a strike on Gaza City. West Texas Intermediate rose 1.1 percent to $86.32 per barrel.

"Given that Iran is always inexorably linked to Hamas, there's a concern about spillover in the region, so the geopolitical premium on oil prices is going to be on the rise in the near term," said John Kilduff of Again Capital.

What Else to Watch

Fed Speakers

9:00 a.m. ET Richmond Fed President Jeffrey Lacker

10:15 a.m. ET Chicago Fed President Charles Evans

1:20 p.m. ET Fed Chairman Ben Bernanke

2:45 p.m. ET Dallas Fed President Richard Fisher

4:30 p.m. ET Philadelphia Fed President Charles Plosser

Follow Patti Domm on Twitter: @pattidomm

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