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Choppy Market Ahead – Increased Volatility

Friday’s plunge in stock prices did some technical damage, suggesting the likelihood that stocks will be under pressure until after the election. Resistance to a rebound early this week will

Friday’s plunge in stock prices did some technical damage, suggesting the likelihood that stocks will be under pressure until after the election. Resistance to a rebound early this week will start at DJIA 13,425 (S&P 500: 1443). This is the 8th correction in the market averages since the June 6 low that preceded a step-like advance of 16% in the broad-based S&P 500 index.

In each instance, it looked like the correction could carry further on the downside, only to reverse back up as institutions stepped in to use lower prices to accumulate stocks. Unless a major correction is foreseen, money managers will use corrections to buy – there’s nowhere else to invest money.

However, odds favor we entered a correction of greater magnitude since the two peaks in mid-September and early October.
It is important to “read” the strength of a rally today/tomorrow. If unimpressive, I see a break below DJIA 13,300 (S&P 500: 1425). It looks like any correction here will take the form of a choppy, sideways-to-down correction as the Street assesses the election results and fiscal cliff possibilities.

Investor’s first read – an edge before the market opens
DJIA: 13,343.51
S&P 500: 1433.19
Nasdaq Comp.: 305.62
Russell 2000: 821.00
(Monday, October 22, 2012 (9:09 a.m.)

The debate tonight may feature rumors that the U.S. is negotiating with Iran regarding the obvious – nukes and sanctions. If so, President Obama can’t say much about it tonight for the obvious reasons. Both countries have denied the rumor.
I don’t think the Iran issue has had much impact on the market, but could if military action is suspected. Iran is the world’s 5th largest producer of oil. If true, bilateral negotiations regarding Iran’s nuclear production would include the U.S., Britain, China, Russia, France and Germany.
So far, corporate earnings for Q3 are coming in a bit better than expected with 81 of 117 of the S&P 500 companies beating estimates, 33 falling short. Friday’s plunge in prices was triggered by disappointing earnings in the “tech” sector, Google (GOOG), IBM, Microsoft (MSFT), and Advanced Micro Devices (AMD) led the pack.

How this plays out can hammer stocks, or lift them sharply in celebration that a major negative has been removed from the market environment.

I expect the Republican Party to introduce a plan to “fix” the fiscal cliff before November 6. It would be their party that can break the stalemate, since it has been their party unable to compromise on tax increases due to a pledge to Grover Norquist not to do so. Norquist heads up Americans for Tax Reform. It doesn’t have to have substance, just impact on voters and in turn, the stock marke, which would rally sharply, since the “cliff” has been a drag on the economy for more than a year.

I think this possibility needs to be raised, since it stands to impact stock prices, though not its primary objective.
Uncertainty over the horrors of a plunge over the fiscal cliff will turn to outright fear when headlines on the adverse impact of billions in automatic spending cuts and tax increases replace the debates on Page One.

ECONOMY: Advance estimate Q3 GDP to be released at 8:30 Friday is for 1.9% annual rate of growth.
Richmond Fed Manufacturing Index (10 a.m.) Rose to plus 4 in September from minus 9 in August. New orders rose to plus 7 from minus 20.
PMI Manufacturing Index (8:58 a.m.) – Down 0.4 in September to 51.1 in line with projections, but slow growth continues.
New Home Sales (10 a.m.) –Slipped 0.3% in August to a 373,000 annual rate after a 3.6% gain in July,
FHFA House Price Index (10 a.m.) – Rose 0.2% in July after a rise of 0.6% in June.
FOMC Meeting (2:15 p.m.) – Fed policy on rates expected to remain the same.
Durable Gods (8:30 a.m.) – Plunged 13.2% in August after a revised gain of 3.3% in July.
Jobless Claims (8:30) – Rose 46,000 for the October 13 week after a revised decline of 27,000 in the prior week. A delayed increase in California at the beginning of Q3 caused a glitch in seasonal adjustment.
Pending Home Sales (10 a.m.) – Index dropped 2.6% in August. Low supply of homes on the market is a reason, especially in the West.
Kansas City Fed Manufacturing Index (11 a.m.) – Slipped to 2 from 8 in August, while production index dropped more ( to minus 4 from plus 7). New orders soft.
GDP (8:30) – Advance estimate for the annual rate of growth for Q3 is 1.9%. Q2 was revised down to a 1.3% annualized rate vs. 1.7% in the second estimate. Q1 was 2.0%, Q4 was 4.1%.
Consumer Sentiment (9:55 a.m.) – Mid-month reading was up 4.8 points to 83.1 from September. The expectations component jumped 6 points to 79.5, the best reading since the beginning of the recovery.
FACEBOOK (FB – $19.00):
Today: Trying to stabilize after last week’s jolt. Expect slow going in coming months, as more than a billion shares become eligible for sale from “lock-up.”

A break below $18.80 would indicate a further drop to $15 – $16. Based on FB’s price action and volume, it appears there are serious buyers in there, but not serious enough to move the stock higher at this time. Why buy when you can wait and buy at a lower price.

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.
George Brooks
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.