A Very, Very Dangerous Rally

George Brooks |

Not a lot of bounce to yesterday’s market, even after  a precipitous plunge and hints of   hope for a breakthrough in Washington’s self-inflicted wounds.  More like  a medicine ball bouncing than a golf ball off a cart path.

   But the market looks like it’s off to a good start today, driven by hope for a resolution to the shutdown/debt ceiling problem.

   This one may be a good one to play “on paper,”  since we are now in a news whipsaw market – up in response to hope, down when hopes are dashed.

   Resistance today starts  DJIA 14,965  (S&P 500: 1,669). If the Street has high hopes for progress over the weekend, look for a push to DJIA 15,125 (S&P 500: 1,685) tomorrow.

   This rally is a high-risk rally, since hopes can be dashed  shortly after they are raised.

ENTER: the news whipsaw

   The U.S. came within a hair of  failing to raise the debt ceiling in the summer of 2011. An 11th hour agreement  resulting in the Budget Control Act of 2011 raised  the debt ceiling by $400 billion and set into motion a host of conditions, including the formation of the “super committee,” a eunuch of all eunuchs.

   What’s important here and really the basis for my warning not to buy the debt ceiling rally is the likelihood  an agreement to re-start the government and raise the debt ceiling will have a number of starts and stops before resolution, with a debt ceiling deal missing the Oct. 17 deadline, but resolved over the following weekend.

   To appreciate the  angst that accompanies this kind of debate,  google, “Timeline: How U.S. debt talks spiraled  into crisis.”

   Based on how much  both parties detest each other, this process should make an Ultimate Fighting Championship grudge match look like an Easter egg roll.

   IF I am wrong, and they resolve this dual issue amicably, the market will rebound, though I am becoming uneasy about the economy and continuing doubts that our country can be governed. These crises are destructive.

   Then too, give the market and economy credit for climbing a vertical wall of worry, but that does not preclude a setback, even a mini bear and mini recession.

   IF I am right, and the Oct. deadline is missed, the market will go SOUTH, tripping NYSE circuit breakers along the way. As I understand it, they can only be deployed once a day !!

   IF all that happens and the U.S. goes into full, or selective default, odds favor a CRASH and full-blown Depression. That means everyone goes into the black hole; only the ultra-rich get to cherry pick the pieces at 10 cents on the dollar.

   For the most part, I am bullish 85%  of the time, but this ship has no life boats, not even life preservers if we go down big again.

   While it is not the macho thing, I prefer to be wrong with my money in my pocket, which means I may miss a move up on occasion, but I believe there are always opportunities.

   Buy right before a big break, and you can spend most of the next rebound climbing out of a hole before starting to make money. The math of getting clothes-lined by a sudden plunge should give pause to reflect.  A 50% loss takes a double to get even !

Investor’s first readan edge before the open

DJIA:  14,802

S&P 500:   1,656

Nasdaq  Comp.:  3,677

Russell 2000:  1,043

Thursday, Oct. 10, 2013     (9:02 a.m.)

 

ON THE LIGHTER SIDE:

   I awoke Tuesday night after strong pangs of  a market disaster. Before going back to sleep, I wrote a headline for Wednesday, but decided not to use it, “Bear Market CRASH – Depression.”

   Of course, everything is darker in the middle of the night. The biggest contributor to my concerns is Washington’s ineptness. I give the crash scenario a 30% chance. Not much room for error here.  CONFIDENCE  in the ability of our country to be governed is on trial here. Even a hung jury is devastating.

TRIVIA:

The new DJIA  ain’t what it used to be:On Sept. 23, Bank America (BAC), Alcoa (AA), and Hewlett-Packard (HPQ) were replaced by Visa (V), Goldman-Sachs (GS), and Nike (NKE). The change has lopped off 128 more points from the average than if the change wasn’t made and increased its volatility since V and GS are higher priced stocks, $196 and $165 respectively.  Since the DJIA is price-weighted, percentage changes in the higher priced stocks tend to dominate the average when they have big moves.  At $196, Visa has more than 8 times the impact on the DJIA as Cisco (CSCO) at 22.50.

STOCKS OF GENERAL INTEREST:

Note:  Currently, there is the potential for sharp moves in stocks in response to developments in Washington. Under these conditions, support/resistance levels are  suspect.

I have added a “debt ceiling crisis” risk level for each stock, a price where these stocks could drop to if the debt ceiling decision goes down to the wire and fear escalates.

Apple (AAPL: $486.59) Positive.

Resistance formidable at $490. Found buyer early yesterday giving credibility to a consolidation (flag) pattern with support$480 - $482. Break above $494 raises odds AAPL crosses $500 , Market permitting. Big market plunge can take stock  into $460s.

Debt ceiling crisis price:  $457 - $462.

Facebook (FB: $46.77 ) Positive, consolidation likely.

No major change. Looks like a panicked seller was met by a buyer when FB was hit at the open Tuesday by a Raymond James downgrade  from strong buy to outperform may put a lid on FB in the $48 - $49 area, but that will be tested today.\. Yesterday’s plunge in  the market broke FB down. Resistance is $48.50, support is $44 - $45.

Debt ceiling crisis risk: $46.50

IBM (IBM: $181.32)  Support failed, IBM now  technically negative but getting cheap.

 I’ll cut Big Blue some slack, since some young deep pocket guys can be expected to nibble  in the $180 area after a 17% spill. Today/tomorrow looks like bump to $184 - $187. Nevertheless, $168 - $ 172 possible in bad market. Debt ceiling crisis risk: $170

Pulte Homes (PHM: $15.58)  Positive, but weakening as Washington dysfunction threatens entire economic/housing recovery.

This is what I refer to as the “ouch” point where a stock drops further than expected and is on threshold of  more downside.  PHM  should find support  between $15 and $15.50.  If housing recovery is at risk, PHM goes to $12.50 - $13.  A rally this week  can bump PHM up to $15.80 - $16.10

Debt ceiling crisis risk: $12.80

First Solar (FSLR:$41.60)  Positive, but market plunge hurting

Bounce back welcome, but not decisive. Even so, $42.60 - $43 possible here. Must hold $40.50. Resistance starts $42.  This has been a big about-face for a stock that looked like it was in a hurry to go somewhere, then hit a wall. Debt ceiling crisis risk: $37.20

Target (TGT: $62.69) Negative.

 What have we here ? The long awaited bargain hunter. Seller got his/her clock cleaned yesterday.  Serves them right for piling on.  $63.80 - $64 possible here. Further market drop can take TGT below $60.Resistance $63.00. What is the message here ?  Consumer temporarily tapped out  ?  What do you see at the malls ? Parking lots ? 

Debt ceiling crisis risk: $59.60.

Hewlett-Packard (HPQ: $22.60)  Negative.

Shareholders gotta love CEO Meg Whitman. Yesterday, she  set HP  into orbit with no less than  a comment that she felt comfortable with HP’s progress and expectation that revenues would “stabilize.” I hope so, I had two ornery HP printers and a computer which I hate more than calves liver. Comments popped the stock  9%. I want to own it when she’s sees a big increase in earnings !!. I have  been saying HP needed a big analyst report, and I still think it does, clearly more than what Whitman delivered yesterday.  But the stock was a coiled spring, and this is what happens when springs uncoil. Some of that was shorts covering.  The buying was panicky. Great bargains usually don’t just sit there letting  big buyers in to buy all they want without moving the price up. Support is now $21.80. I doubt it can move beyond $22.70.  Break below $21 suggests drop to $19.

Debt ceiling crisis risk: $17.90

EBAY (EBAY: $52.33) Positive.

Market plunge took toll Tuesday with a follow-through yesterday.  Nimble traders should be watching EBAY as it probes for support a smidge north of $51. This week:  $ bounce to $54 possibleResistance is $54, support $51.60

Debt ceiling crisis level now $51.

Amazon (AMZN: $298.23 ) Positive.

Market plunge still taking a toll, but AMZN trying to rebound above $297.  Once past $300, stock can attack $304 - $308.. Resistance is $309, Support $296

I do not own, nor am I short: AAPL, FB, IBM, PHM, FSLR ,TGT, HPQ, EBAY, AMZN.)

 

ECONOMIC REPORTS:  A light reporting week shaping up. Some reports will be delayed due to shutdown, though Federal Reserve based reports and private sector reports won’t. The economy is not currently center stage, though the deadlock in Washington will hurt the economy and confidence and business decisions going forward.

   For a detailed account of past and current economic reports, including charts go to: mam.econoday.com - www.mam.econoday.com

THURSDAY:

Jobless Claims (8:30) PROJ.: week ended 10/5  310,000- vs. 308,000 prior week

Import/export Prices (8:30) PROJ.: Sept. +0.2 pct.  vs +0.1 pct Jly.

Fed’s Bullard speaks (9:45)

Treasury Budget (2:00)

Fed’s Williams speaks (2:30)

FRIDAY:

Producer Price Ix. (8:30) PROJ.: Sept. +0.2 pct  vs. +0.3 pct Aug.

Retail Sales (8:30) PROJ.:  zero gain Sept. vs. 0.2 pct gain Aug.

Consumer Sentiment (9;35) PROJ.: Index Sept. 75.0 vs final Aug. 82.1

Business Inventories (10:00) PROJ.: Aug. +0.2 pct.

RECENT POSTS:

Sep 20  DJIA   15,636   “Raise Cash for October Opportunity”

Sep 23  DJIA   15,451   “Can a Normal Correction Become a Bigger One ?”

Sep 24  DJIA   15,401   “Opportunity Looms as Storm Clouds Form”

Sep 25  DJIA   15,384   “Brinkmanship Starts – What to Do”

Sep 26  DJIA   15,237   “Street Not Worried – Yet  Should You Be ?”

Sep 27  DJIA   15,328  “Prepare for an October Buying Opportunity”

Sep 30  DJIA   15,258  “Makings of an October Buying Opportunity”

Oct  1   DJIA   15,129  “Now the Scary Part – the Debt Ceiling – Default ?”

Oct  2   DJIA   15,191  “Potential for a Deadline to  be Breached”

Oct  3   DJIA  15,133   “Debt Deal to Miss Oct.17 Deadline – Settle Over the

                                      Weekend – DJIA  Bottoms Oct 18,  12,760 (intraday)”

Oct 4   DJIA   14,996   “Weekend Proposal on Shutdown – a Head Fake ?”

Oct 7   DJIA   14, 936  “DJIA 12,760  if Oct. 17 Deadline Missed”

Oct 8   DJIA   14,936   “Don’t Chase This Week’s Rally

Oct 9   DJIA   14,776   “Don’t Buy A Debt Ceiling Solution Rally”

  George  Brooks

“Investor’s first read – an edge before the open”

sensiblesleuth@gmail.com

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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. Brooks may buy or sell stocks referred to herein.

 

 

 

 

 

 

 

 

 

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