Broader Market Struggles for Meaningful Gains as Investors Wait for Next Catalyst

George Brooks |

Investor’s first read - Brooksie’s edge before the open

Wednesday, September 19, 2012 9:16 a.m.
DJIA: 13,564.64
S&P 500: 1459.32
Nasdaq Comp.: 3177.80
Russell 2000: 855.63

The big run in stock prices since July 24 was partly driven by expectations of a European rescue of the euro, but also by hopes for QE3 from the Fed. What drives the stock market higher from here?

While the general market averages (indexes) may struggle to post meaningful gains, selective opportunities will reward as institutions alternate their focus on various industry groups.

POSITIVES:
-European leaders are determined to prevent the euro’s collapse
-Europe, China, Japan fully engaged in stimulating economies
-U.S. QE3 is open-ended without $$$ or time limit
-After leading and driving U.S. economy to its knees for the worst recession
since the 1930s, the Housing industry’s recovery is gaining traction.
-After a 55% plunge (2007 – 2009), the broad-based S&P 500, has recouped
most of its loss, also the worst since the 1930s
-War in Iraq over, Afghanistan in the process.
-U.S. banking system vastly strengthened
-Inflation still low in spite of Fed’s actions
-Institutions have nowhere else to invest client’s money. Any sale of stock results in
cash that must then be put to work.
-Debt ceiling fight avoided

NEGATIVES:
-QE3 may not work.
-Europe may not be able to prevent the collapse of the European Union
-Inflation may pick up once global economies shift into high gear
-Iran’s efforts to develop nuclear weapons may result in pre-emptive attack on it,
triggering a huge surge in oil prices.
-Global recession, with major adverse impact on the U.S. may be unavoidable
-Up 119% from the bear market bottom in March 2009, the S&P 500 may be
overpriced
-Uncertainties of the election
-ugliness of resolving the fiscal cliff

CONCLUSION:
The positives have the edge. Most of the negatives assume the worst, which presently looks unlikely. While “pricey” in terms of the magnitude of its rebound, the stock market is really the only option investors have to obtain a return on their investment.

At historic highs, ( interest rates historic lows) long-term bonds are a bubble waiting to burst. While the politicians may want to avoid addressing the problems posed by the fiscal cliff, the press, hungry for more raw meat to chew on, won’t let them. Who gets hurt by spending cuts, automatic or agreed on, is scary, tax cuts/extensions, as well.

TODAY: A three-day sideways consolidation, following last Thursday’s QE3 run up, should be resolved on the upside with DJIA 13,650 (S&P 500:1475) a possibility today, barring unexpected news.
While odds favor a move up, there has been a tendency for the market to shake the tree when least expected with a sudden plunge, which in this case would call for a drop to DJIA 13,517 (S&P 500: 1454) – kind of a shake-rattle, before a roll.

FACEBOOK (FB) at $21.85:
Today: No change. A break above $22.15 calls for an attempt to hit $23. A rally failure indicates a drop to $21.12. At some point we should see a pick up in selling from traders who bought lower and sellers who were alarmed by its drop below $18 and are going to use this rebound to lighten up.

FB’s Sept. 4 low of $17.55 is looking pretty good right now, though a move down to a smidge below $19 as a “test” is possible. I think I have achieved the goal that I set in May, that is to offer daily guidance for followers of FB starting at $34 on May 21 with my warning about a drop to the $24 - $26 area, 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 for the stock at $16.88.

On September 4, it hit $17.73 before rebounding into the 20s over the last six days. I plan to cut back on coverage, commenting on occasion when I think it would be helpful. 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 I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.

George Brooks
*Bloomberg.com

…………………………………………………………………………
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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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