Mr. Market clearly spent the past week glued to the major media coverage of the “fiscal cliff” and Washington’s inability to find a compromise solution before year end. Nevermind the fact that nothing will really happen on January 1st to make the economy take a nose dive, stocks still found cause to take a nose dive of their own. And I’m finding more reason to turn down the volume on CNBC.

It seems to me that much of the weakness in the stock market over the past couple of months is due more indirectly to the fiscal cliff than directly to fears of an economic slowdown. Investors are likely taking capital gains at today’s lower rate ahead of an increase in the capital gains rate.

Apple’s share price performance of late is probably evidence of this same effect. What stock has been both more widely held and generated more capital gains than Apple? None I know of. So investors are no doubt looking at their unrealized gains and calculating how much more they will have to pay by waiting to sell after the calendar rolls over to 2013.

Successful traders know that tax issues should not drive your buy and sell decisions. Joe Investor, on the other hand, is not so savvy and this creates an opportunity for investors willing to take advantage of Apple’s cheapest valuation in years.

As for the broader market, which is still heavily influenced by Apple’s share price, I’m still feeling bullish. Any resolution in this fiscal cliff issue should be a positive for stocks. You may remember the market acted similarly surrounding the last debt ceiling debacle. In relation, the current situation feels vaguely familiar.

Longer-term, however, I’m more worried. Fundamentally and technically the stock market is starting to look tired. I won’t touch government bonds that guarantee investors will lose money to inflation over the coming years and I don’t see many other opportunities on the horizon.

Chart of the Day:

sc (6)

Gold has caught my eye recently. Both the daily and weekly charts below show it dropping to important support levels. While bonds seem like a loser’s bet in the inflation game, gold at current levels seems like it may be a great alternative.

Hit the Links:
  • Ordinary folks are losing faith in stocks (AP)
  • IPOs slump to their lowest level since the financial crisis (Bloomberg)
  • Reading the pessimism in the market for bonds (NY Times)
  • Amateur investors have a few key advantages over professionals (Business Insider)
  • Charlie Munger on “circle of competence” (25iq)