While the Nasdaq Composite and Russell 2000 paused for a rest yesterday, the DJIA and S&P 500 weren’t ready for one, continuing a steady uptrend that started in late December.
The international scene has stabilized somewhat; individuals and corporations have a better understanding what their taxes will be going forward; Q4 earnings were better than expected; the U.S. economy is moderately upbeat; and Congress may be ready to address pressing problems, though that will not be known until March/April.
Money managers have no alternative to buying common stocks. This is money they have to put to work. This does not preclude a correction/consolidation, but it can delay one.
Q4 GDP was reported this morning. Due primarily to the largest drop in defense spending in four decades, it was a 0.1% annual rate of growth bringing 2012 to a 2.2% rate vs. 1.8% in 2011.
There was little reaction to the report in the futures market, but this number was significantly lower than expected, so the reaction may be felt in trading during the day.
TODAY: I still see a need for the market to digest its sharp January upmove, which suggests selective buying and not chasing stocks that have had a sharp recent surge.
Investor’s first read – an edge before the open
DJIA: 13,954.42
S&P 500: 1,507.84
Nasdaq Comp.: 3,153.66
Russell 2000: 907.31
Wednesday, January 30, 2013 (9: 14 a.m.)
INTERNATIONAL – DAVOS:
“Optimism but with a sober tone,” is how Bank of America (BAC) CEO Brian T. Moynihan characterized the World Economic Forum in Davos, Switzerland last week. The mood contrasted drastically from 2008 prior to the global meltdown when John Thain, CEO of NYSE Group, Inc. referred to the financial markets and world economies as, “all actually in quite good shape.”
After this year’s forum, Ray Dalio, Bridgewater Associates LP, world’s largest hedge fund managing $130 billion said low interest rates will trigger a shift of money into riskier investments making 2013 a “game changer” for the economy.
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 Vanguard Long-Term Bond ETF (BLV) is down 5.6% since mid-November. For the same period, the PowerShares, 1-30 Laddered Treasury Portfolio (PLW) yielding 2.2%, is down 4.4%, and he SPDR Barclays Long-Term Treasury ETF (TLO) yielding 2.6%, is down 6.2%. All three would be down more if I used their July highs. The short-term bonds are obviously not a problem.
APPLE (AAPL: $458.27)
Two weeks ago, I targeted $438 as a likely support level should $468 fail to hold after a break down through $500. It hit $438 Friday, bounced briefly then closed there. Monday, it notched up again at the open, then traded sideways for the rest of the day.
Sellers are still there waiting to feed stock out on any show of strength. I believe this selling comes from analysts who turned bearish more recently after AAPL had already plunged 30%.
Yesterday, I said what was needed was a one-day reversal that closed above $455 on very heavy buying. It closed at $458, but the volume was not convincing.
While AAPL’s price action in the last two days has been impressive, but the stock needs bigger volume to complete a turning pattern.
Near-term support is $452, and pre-market trading suggests that level is at risk. A drop below $444 would signal a test of its $435 low and that could get ugly. Should this turning pattern fail, I see a drop to $398.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB – $30.79): Sellers appeared for the second time above $32, dropping the stock $1.67 points yesterday. Between January 14 and January 18, FB’s stock dropper 8% before buyers stepped in. Obviously, there will be bouts of profit taking, the stock is up 63% in two months.
But earnings reported after the close today are expected to be up nicely, and pre-market trading indicates a higher open today.
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.
ECONOMY:
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: www.mam.econoday.com for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports. The site does a great job graphically illustrating key indicators.
The ADP Employment report (Wed. 8:15) and Employment Situation report (Fri. 8::30) are key reports this week. The final Q4 – GDP estimate comes Wed. (8:30). The last estimate was for an annualized gain of 3.1% revised up from 2.7%.
Housing has been upbeat, more importantly home prices have been rising, parly due to a shrinking number of houses for sale.
Why is this significant for consumer confidence ?
It’s called the “wealth effect.” When people feel good about their net worth, or just better about a net worth that took a big hit in the Great Recession, they will spend and invest more. Corporations will begin to spend the trillions of dollars in they have been hoarding over the years.
Business will gain traction and interest rates will rise.
People fled to U.S, Treasury bonds as a refuge from financial disaster/uncertainty. Many bought long-term bond funds intending to increase their return, since CDs, money markets, T-Bills yielded next to nothing.
As interest rates rise the value of many of these bond funds will decline.
All bubbles eventually burst !
TUESDAY:
S&P Case-Shiller Home Price Ix. (9:00)
Consumer Confidence (10:00)
WEDNESDAY:
ADP Employment Rept. (8:15)
GDP (8:30)
FOMC Meeting Announcement (2:15 p.m.)
THURSDAY:
Jobless Claims (8:30)
Personal Income/Outlays (8:30)
Employment Cost Ix. 8:30)
Chicago PMI (9:45)
FRIDAY:
Employment Situation (8:30)
Consumer Sentiment (9:55)
ISM Mfg Ix. (10:00)
Construction Spending (10:00)
*Davos coverage – Bloomberg
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.
