The dreaded sequestration went into effect on Friday, and the market continues to be nervous about how it will play out.  Market sentiment seems to be that Congress will do little or nothing this month as the first effects of the budget have been relatively mild, like the cancelation of air shows by the U.S. Navy Blue Angels and the U.S. Air Force Thunderbirds. That attitude is likely to change as sequestration cuts begin to affect more sensitive areas like school funding and Medicare. The bottom line is, either Congress and the President will start learning how to play together for the good of the country, or the automatic budget cuts will take effect which will send ripples if not major quakes through the entire economy.

It has been an unusual week to say the least. The market has declined a tad on the indecisive Italian election and the still uncertain outcome of the sequestration issues despite a robustly positive series of economic news and a very positive testimony from Chairman Bernanke who emphasized that the stimulus would continue as previously projected until employment and economic growth has improved.  

From the Fed, from Congress and President, and from Europe for starters. Chairman Bernanke may give us the former as he testifies on Tuesday and Wednesday this week.  Congress must act by Friday over the sequestration issues.  And Italy could’ve helped a bit today if its election resulted in a more stable government, although that does appear to be happening.

After a long weekend, the market got a decent start to the new week from favorable European economic reports this morning and our own political “calm before the storm.” Last week was frankly more upbeat than many expected as the market continued its advance to new highs, albeit slowly. And it was a quiet one ahead of the President’s Day weekend with a less partisan State of The Union speech from the President.

Regardless of what I say, the market clearly wants a plan from the President and Congress so that sequestration can be avoided on March 1, 18 days from now.

Our forward-looking SectorCast predicts things won’t go well—for the first time in the history of the model, the top three sectors, Consumer Cyclicals, Non-Cyclicals, and Technology, are all flight-to-safety. Last week, the market eked out a slight gain. While all style/caps were positive, only two sectors were positive on a cap-weighted basis: Consumer Cyclicals and Technology. The rest were mostly marginally negative.

January was a good month for the market as the S&P 500 reached a new 5-year high at 1498, up about 5% for the month.  February has started strong, up yet another 1%. Mid-caps dominated the month along with Small-caps, but no style/cap did poorly.  For the month, the leading sectors were Healthcare, up a whopping 9%, as our forward looking SectorCast had predicted, along with Industrials, up about 8.5%, followed by Financials and Energy, up about 8%.

We come into the week riding a new five-year high for the S&P 500 and eight consecutive positive trading sessions.  But a busy week lies ahead with a bevy of economic reports and a boatload of Q4 earnings.  So far we’ve only had a peek at the first couple economic reports, and they were mixed with Durable Goods riding transportation to beat an expected 1.7% increase (after last month’s 0.7% increase) with a solid 4.6% gain.  However Pending Home Sales

First and foremost, the week will be filled with important earning reports, along with forward guidance from most reporting companies.  Google (GOOG), Texas Instruments (TXN), and Advanced Micro Devices (AMD) kick off the week for the Technology sector after today’s market.  Delta Airlines (DAL) met its projected numbers and is being rewarded as we write with a 3.3% gain.  The Materials Sector (XLB) is doing well following strong earnings reports by Freep

Well, we fell, tumbled, leaped, jumped, or merely stepped off the fiscal cliff, and it’s too early to judge the extent of our injuries, if any.  What is clear, though, is that Congress kicked a bunch of cans down the road which creates a continuing struggle for a rational budget, a rational debt ceiling, a rational tax policy, and a rational healthcare plan.

Clearly the market wants the fiscal cliff resolved and in a way that doesn’t destroy or seriously hurt the economy.  Today was proof.  President Obama and House Speaker Boehner’s 45 minute meeting generated a solid market advance in excess of 1%, despite a horrid Empire State Manufacturing index release.  The days remaining until “the cliff” are dwindling fast.