I still expect a vote by Congress by about 10:45, December 31, to head off sequestration. I expect the framework of a deal to address the Bush tax cuts, and certain key spending issues, but leave the heavy lifting to the new Congress. Until the House was unable to even vote on its own bill last week, the market thought so too, per its generally upbeat behavior since early October. That may have changed Friday.
DJIA: 13,190
S&P 500: 1430.15
Nasdaq Comp.: 3,021.00
Russell 2000: 847.92
Monday, December 24, 2012 (9:06 a.m.) EARLY CLOSE today – 1:00p.m.
It would take days to draft any tentative agreement made between President Obama and House Leader Boehner before it could be submitted to Congress for a vote. By waiting until after Christmas, Congress has cut it far too close if it is to head off sequestration.
The Associated Press reported “Tea party activists are cheering the recent Republican revolt in Washington [Plan B] that pushed the country closer to a fiscal cliff that forces tax increases and massive spending cuts on virtually every American,” quoting Christine Morabito, president of the Greater Boston Tea Party as saying, “Sometimes things have to get a lot worse before they get better.”
AP notes, “Anti-tax conservatives from every corner of the nation echo her sentiment.” (reportedly)
If we go over the cliff, taxes will increase, so why would the tea party force sequestration ?
Wouldn’t it be better to enable tax increases on a small percentage of the tax payers by agreeing to a framework of a deal before December 31, head off sequestration, then let the new Congress negotiate spending cuts and tax reform in a bipartisan effort to address our problems ?
This is a reason for a deal before year-end.
DEBT CEILING:
The U.S. is expected to technically “run out of money” to pay certain bills before year-end, though the Treasury can by time until Congress approves, OR REJECTS, a debt ceiling increase.
Debate will begin in early 2013. If it is as divisive as it was in July/August 2011, it will weigh heavily on economic and stock market sentiments.
Post-election years tend to be downers* and 2013 should not be an exception. The pols seek to get unpopular issues off their plates in post-election years to clear the way for the mid-terms and even years approaching the presidential election year.
Sequestration may be the only way certain members of the Tea Party can get “off the hook” in their pledge to Grover Norquist NOT to raise taxes.
If any body is able to find “wiggle room,” it is Congress, suggesting the horrors of sequestration do not have to be as severe as the PRESS wants you to think they are.
But over the near-term, perception trumps reality on Wall Street, and investors are taking no chances – they are selling (for now).
Why should investors take precautions and raise cash in face of a prospective decline in the market ?
What investors do not want to do is spend the ensuing rebound recouping what was lost in the preceding decline. If they have cash, they have the chance of reinvesting near the end of the correction and make money on the rebound.
CONCLUSION:
While the market was down sharply Friday, it recouped one-third of its losses before the close suggesting the Street does not expect sequestration. Stock-index futures this morning are indication a mixed open, further suggesting the Street doesn’t see disaster.
We can get a rally today to DJIA 13,224 (S&P 500: 1433). (Cliff news can change this in a heartbeat). Risk is a drop below DJIA 13,120 (S&P 500: 1,422).
APPLE (AAPL: $519.33)
AAPL rebounded Friday off support at $510 Friday raising hopes that a breakdown below $500 isn’t imminent, however upside is limited by some very formidable resistance between$524 and $528.
If a 24% drop does not attract aggressive buyers at this level with AAPL selling at 11.5 times trailing 12 months earnings, AAPL will go lower.
Whether we go on to break below $500 and down to my worst case target of $445 – $465 depends on the BIG money. It may think these levels are attractive enough to begin serious buying.
AAPL’s pattern is weak. Breaking support at $510 would signal serious weakness and increase odds of a drop below $500, first stop $485.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB – $26.26):
Unable to break out above resistance at $28.35 and under pressure from weakness in the market Friday, FB is now probing for support at lower prices. Support is $24.5 – $25.5.
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.
ECONOMY:
Note: While the fiscal cliff hogs the spotlight, any sudden weakness in the economy would give Congress and the President second thoughts about sequester and its adverse impact on the economy. I am going to list the economic reports but not include the numbers from the last report, since those numbers are often revised 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.
WEDNESDAY:
S&P Case-Shiller Home Price Ix (9:00)
Richmond Fed Mfg Ix (10:00
THURSDAY:
Jobless Claims (8:30)
New Home Sales (10:00)
Consumer Confidence (10:00)
FRIDAY:
Chicago PMI(9:45)
Pending Home Sales (10:00)
*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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