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Why the Dow Fell Yesterday

Concerns over how politicians will handle the fiscal cliff was the biggest driver behind why the Dow fell yesterday, tumbling more than 300 points in its biggest loss this year.

Political worries were exacerbated by worse than expected monthly sales from McDonald's Corp. (NYSE: MCD) and fears that Apple Inc. (Nasdaq: AAPL) had entered a bear market.

The fiscal cliff continued to dominate investor sentiment today as both Republicans and Democrats expressed their intentions of working together to find a solution to the impending crisis but failed to offer any concrete evidence of their willingness to budge from long-held positions.

Afraid that Republicans and Democrats will not compromise, even when the stakes are high, investors are bailing out. It is too close to the end of the year-too close to bonus time-to be a hero now.

In his victory speech following his re-election on Tuesday, U.S. President Barack Obama said that he is "looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together."

Senate minority leader Republican Mitch McConnell said, "To the extent [the President] wants to move to the political center, which is where the work gets done in a divided government, we'll be there to meet him halfway."

Jim Manley, a former aide to Senate majority leader Democrat Harry Reid, hoped that President Obama would become more personally involved in the negotiations on the resolution of the fiscal cliff.

"He's simply going to have to take a more active and forceful role," Manley told Bloomberg News. "He never got involved in the nitty-gritty of the legislative process. In light of the hyper-partisanship that still surrounds Capitol Hill, he's going to have to change, and he's going to have to take more of a lead in breaking the logjam."

Why the Dow Fell: Earnings Disappoint

Many investors were also discouraged by McDonald's monthly sales figures for October, which showed the first monthly sales decline in nine years for stores open at least 13 months.

McDonald's CEO Don Thompson cited the "pervasive challenges of today's global marketplace" for the declines, according to CNBC's Website, by which he meant increased competition from the hamburger chain's rivals.

Apple shares continued to decline today after dropping more than 20% from their 2012 high by the end of trading on Wednesday. Many traders believe that a 20% decline means that a share has entered a bear market. The shares are trading around the $545 level at mid-afternoon. There is some support at the May 18, 2012 low of $522.18 but, if Apple breaks below that, the next stop would appear to be the 500-day simple moving average at $454.34.

Will the Dow Fall Again?

Yesterday's rout seems to have done some serious technical damage to the Dow Jones Industrial Average.

Wednesday, the Industrials closed below their 200-day simple moving average for the first time since June 5, 2012. The rising 200-day moving average, which had been supporting the rally, should now be resistance. There is additional support for the Industrials in the 12,500 to 12,600 range.

The S&P 500 Index is also at a critical point. At mid-afternoon, it is trading just below 1,385 and its 200-day simple moving average is 1,380.75. A close below the 200-day simple moving average would indicate further weakness.

But, if the S&P 500 can hold above the 200-day moving average, then it could signal a bottom and ignite a rally similar to what happened in early June.

Right now, the politics, fundamentals and technicals are all combining to make investors very wary. Keep an eye on the S&P 500 toward the close to see if it can hold the critical support at the 200-day simple moving average.

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  1. Victor | November 9, 2012

    Hedge funds and other big money were adjusting their portfolios as well.

    Look for pharmaceuticals to rise.

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