Beware - Breakout - Fakeout in the Offing?

George Brooks |

Stocks Up DownBrooksie's Daily Stock Market blog  - an edge before the open

Tuesday, September 20, 2011     9:12 am EDT

DJII:  11,401.01    S&P 500: 1204.09

I would love to say BUY, but just don’t feel it yet.  Sharp, but brief rallies – Yes !  A sustained upmove – No !

I think the market needs more time in this sideways consolidation phase.

A brief surge above the consolidation highs of DJIA 11,740 (S&P 500: 1220) could occur in face of good news out of Europe and action by the Fed to stimulate the economy, but odds favor that such a breakout at this time would be a fake out like it was on August 1 when it became apparent that Congress wouldn’t force the U.S. government into default.

The consolidation  that  started on August 9 has ranged between DJIA: 10,588 and 11,740 (S&P 500: 1101 and 1220) and can continue for several more weeks with a good chance that the market averages will break out on the downside, possibly dropping below DJIA 10,000 (S&P 500: 1050).

The extent of the decline would depend on the news flow at the time.

    If it happens, start preparing for a buying opportunity. It could get scary. The doomsters would preach meltdown, fear would manifest itself into hopelessness as one projected support level after another caves in until capitulation is reached, when only the BIG money would want to buy stocks.

Clearly there is enough money earmarked for buying stocks, and with interest rates at historic lows, there seems to be nowhere else to invest one’s money.

According to Bloomberg.com, more money  ($75bn) was withdrawn from equity funds since April than in the five months following the collapse of Lehman Bros.. That kind of bearishness is more characteristic of buying junctures, than selling junctures.

Nevertheless, the market is probing for a comfort level, where known and perceived negatives are discounted enough to trigger aggressive buying.

By a number of fundamental yardsticks, stocks are cheap.

Why then isn’t the BIG money buying aggressively at current prices, even paying up, for targeted stocks ?   Nibbling – YES !,   Paying up – NO !

Great buying opportunities usually don’t sit there waiting for all investors to get on board.

   I think too much has been expected of this economic recovery. I am amazed that the stock market has rebounded from its March 2009 bear market lows as much as it has.

We came within a Grizzlie’s hair of  a meltdown, still aren’t totally out of the woods, yet the S&P 500 is up 79% and Nasdaq Comp. up 105% from those lows.

Looking at a chart of the last four US recessions  and recoveries and employment as a percent change from the GDP peak quarter*, it is obvious that the recovery of the economy and employment is a product of the severity of the preceding recession. It takes time, in this case lots of time.

12-member SuperCommittee timeline:**

Sept. 22: Deadline for Congressional consideration of resolution of disapproval for first $900 bn tranche

of debt limit increase.

Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.

Oct.: 14:  Deadline for House and Senate  Standing Committees to submit recommendations.

Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction  goal of $1.5 trillion .

Dec. 2: Deadline for committee to submit report and legislative language to President Obama and

Congress.

Dec. 23: Deadline for both houses to vote on committee bill.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if

the committee’s legislation has not been enacted.

Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.

Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche

($1.2 – $1.5 trillion) of debt limit increase.

Fall/Winter 2012: When additional $2.1 - $2.4 trillion of borrowing authority from this law runs out.

Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary

to meet spending cuts required by the “trigger.”

George  Brooks

*The Economist online

**National Journal

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The writer of Brooksie’s Daily Stock Market blog, 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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