I expect the political jousting to get ideologically ugly in coming months, as both parties square off over raising the debt ceiling and spending cuts not addressed by Congress December 31.
That spell’s uncertainty, which is something the market doesn’t handle well.
If I am wrong about that, I am wrong about the market going into a meaningful correction.
Just how disruptive the debate about the debt ceiling and where spending cuts will be made won’t be known for months.
With the market at bull market highs, I think caution is warranted.
The sharp rally that occurred in the last four days was in response to news about Congress’ vote, but it didn’t occur on heavy volume.
Typically, January gets institutional buying by money managers who receive cash to invest in the new year, as well as the reinvestment of cash raised by portfolio adjustments made before year-end.
It is a time when the Street’s gurus publish forecasts for 2013’s big winners (!), and a time when investors gear up with plans to make some serious bucks (!).
TODAY:
The market needs some serious buying (increased volume). A rally failure where the market closes at the low for the day would signal weakness.
I did a technical analysis of each of the 30 Dow Jones industrial stocks and converted my assessment into the DJIA and concluded near-term risk is 13,260, but the potential near-term upside is 13, 595.
Obviously, I can’t analyze 500 S&P stocks, but near-term risk there is 1,445 and near-term upside 1,481.
DJIA: 13,435.21
S&P 500: 1,466.47
Nasdaq Comp.: 3,101.66
Russell 2000: 879.15
Monday, January 7, 2013 (9:10 a.m.)
DEBT CEILING
The nation has a need for an increase in the nation’s debt ceiling in order to pay bills already approved and contracted for. Until the summer of 2011, it was a ho-hummer, with 8 approved raises over the last 10 years, 85 over the last 100 years.
However, hostilities in Congress got so ugly in 2011, the DJIA tumbled 12% in7 days following a decision to raise the debt limit. S&P lowered its credit rating for the U.S. government.
I see no reason why we won’t get round two in February/March. We reached the debt limit on January 2, but the Treasury has enough wiggle room to buy a couple month’s time.
A POSITIVE NOTE:
While I am bearish about the early months of 2013, the year can produce a lot of attractive opportunities, just at lower prices.
The U.S. economy has recovered from the worst recession/bear market since the 1930s. We survived, and that is huge.
Housing is in recovery mode, increasing homeowners’ “wealth effect,” corporations are flush with cash and hopefully the 113th Congress can resolve key spending issues, setting the stage for a sustainable recovery beyond the current one.
I see an interruption to the bull market in coming months that started in March 2009, but which has not fully run its course. Individual investors are largely absent, but they will return to buy near the end of the bull market when speculation ramps up. That can be a year or two out.
BOND MARKET:
I was premature in my earlier forecast that the long-term bond bubble would burst, but now feel it has already begun with a top traced out between July and December. U.S. Governments were in demand as a refuge from international chaos. As the tensions from European sovereign debt woes abate, money will flow out of safe havens and into stocks where a better return is hoped for. The short-term bonds are obviously not the problem, but long-term bonds are vulnerable.
JANUARY BAROMETER (JB)
(I will repeat this piece about the JB throughout January for new readers, and since it will get a lot of press as the month passes).
There is a seasonal indicator with a good record. It’s the January Barometer (JB), developed 40 years ago by Yale Hirsch, Stock Trader’s Almanac.
This is an annual reference every serious investor should have.
In short, as January goes, so goes the market for the year, generally speaking.
Essentially, the logic behind the JB is that institutions tip their hand as the new year unfolds with the execution of a decidedly bullish or bearish strategy which is reflected in stock prices in January.
A word of caution, all indicators should be viewed with an open mind. While the Almanac boasts an 88.7% accuracy rate for the JB over 62 years, any number of things can happen to change the market’s direction to challenge the JB’s forecast.
Since the big jump in stock prices on January 2nd’ was largely the result of the decision by Congress avoid a plunge over the fiscal cliff, the JB’ forecast may be distorted this year. Congress could have made a decision in 2012, depriving January of its jump-start.
Why wait for the results of the full month when the first five days of January can give an advance for the market’s direction in January. This “early warning” indicator sports an 84.6% accuracy rate,
Here again, the risk of distortion comes in to play.
You will read and hear about the JB in coming weeks, respect its time-tested accuracy, but keep an open mind.
APPLE (AAPL: $527.00)
This time down is a big test for AAPL. It must attract serious buyers in coming days if it can continue to trace out a basing pattern strong enough to support a sustainable rebound. I can see more slippage to the $517 area today, but this is a big-hitter’s stock. It is down 25% since September. It sells at12 times earnings. If they see the fundamental outlook deteriorating significantly, it will break $500. Otherwise, a 25% discount should be enough to bring them back in. That would be signaled by a heavy volume one-day reversal where the stock reverses to close at its high for the day. It has held three times since mid-November a smidge above $500, this will be its fourth test – critical.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB – $28.76): FB is on the verge of breaking through resistance between $27 and $28. Next resistance is $31 – $32.
If you have access to a daily chart, this is a good example of what I refer to as resistance. FB has been trying to advance through the $28 – $29 area since early December, and it gave it a good go Friday.
Resistance, also referred to a “overhead supply,” is created when buyers hit a wall of selling in a specific area. In FB’s case, sellers came from three sources. There were traders who bought it at lower prices, many below $20. And are taking profits. There were investors who bought it in the mid-to-high 30s and woefully saw it drop below $18. Now at $27 – $28, they sell fearing it will go back down, and after all, their loss here is far less than when FB hit bottom at $17.55. Finally, there are IPO investors who were set free to sell after their “lock-up” status expires.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21. I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38. I’ll continue technical coverage for a while to accommodate readers.
As for Apple, well it is a big-name stock that got shellacked in a short period of time, I wanted to help out targeting a bottom as with FB. I don’t have a position in the stock, long or short.
ECONOMY:
Note: I am going to list the economic reports will not include the numbers from the last report, since those numbers are often revised significantly and therefore potentially misleading.
I suggest you access the website: www.mam.econoday for details reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports.
TUESDAY:
Richmond Fed Bank President, Jeffrey Lacker speaks 1:30 p.m.
THURSDAY:
Jobless Claims (8:30)
Wholesale Trade (10:00)
Kansas City Fed Bank President Esther George speaks 12:45p.m.
St.Louis Fed Bank President James Bullard speaks 2:00 p.m.
Minneapolis Fed Bank President Narayana Kocherlakota speaks 8:00p.m.
FRIDAY:
International Trade (8:30)
Import/Export Prices (8:30)
Treasury Budget (2:00 p.m.)
Phila. Fed Bank President Charles Plosser speaks 9:30 p.m.
RECENT POSTS:
Dec 19 DJIA 13, 350 “Has Cliff Deal Been Discounted by Sharp, 3-Week
Surge ?”
Dec 20 DJIA 13,251 “Weekend Announcement ? Rally Fake-Out Monday ?”
Dec 21 DJIA 13,311 “Deal Before Dec. 31 Still Possible”
Dec 24 DJIA 13,190 “Bear Market 2013 or Just Ugly Volatility ?”
Dec 26 DJIA 13,139 “Don’t Buy a Fiscal Cliff “Deal” Rally”
Dec 27 DJIA 13,114 “ Congress Returns – White Knuckle Time”
Dec 28 DJIA 13,096 “Don’t Buy a Cliff “Deal” Rally – 2013 Rocky”
Dec 31 DJIA 12,938 “Deal Tonight ? But Rally a Fake Out”
2013
Jan 2, DJIA 13,104 “Rally a Fake Out – Opportunities in 2013 But at Lower
Prices”
Jan 3 DJIA 13,412 “Rally Ends Today ?”
Jan 4 DJIA 13,391 “ Bull/Bear Tug of War”
*Stock Trader’s Almanac: The new one is out – get it !
George Brooks
“Investor’s first read – an edge before the open”
[email protected]
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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