While we didn’t get a “cliff” announcement yesterday, I think the market rose in anticipation of one.
This morning we are greeted by another proposal by the White House, though pre-market trading does not indicate it is one both parties will agree to.
I expect them head off sequestration with a vote on a few key issues before December 31, but leave a lot of issues to be resolved when the new Congress takes office January 2.
It would take days to draft any tentative agreement made between President Obama and House Leader Boehner before it could be submitted to Congress to consider and vote on.
Odds favor that agreement will come before Christmas, but not approved (with changes) until December 31.
If the market was down sharply in face of the uncertainty accompanying the cliff debates, I would be less concerned with a rally failure when an agreement was reached, but the market is up in expectation of a deal, and that suggests a vulnerability.
Uncertainty will continue AFTER a deal. That suggests a sharp decline or choppy, sideways-to-down trend into March/April.
DJIA: 13,235.39
S&P 500: 1430.36
Nasdaq Comp.: 3010.60
Russell 2000: 835.03
Tuesday, December 18, 2012 (9:10 a.m.)
What about “NO DEAL” before January ?
Possible, but only temporarily to facilitate members of Congress who need an “out” on their pledge to Grover Norquist NOT to raise taxes.
TODAY:
Let’s say a tentative agreement to a framework of a deal is announced over the weekend before Christmas, or Monday morning before an early close. Logically the market would rally either in anticipation of that announcement and clearly on the day of the announcement.
I think investors should be selling into the rally, if not before Christmas, then at 9:50 the day of the announcement if we get a “gap” open (big jump at the open).
I am not trying “to call a shot” here, I simply want to alert readers to the likelihood of the market doing what is UNEXPECTED when good news is announced.
There is risk in buying on news, especially if it has been long hoped for and comes when the market has already run up.
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.
So, it could get ugly.
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.
What’s more, who knows what “new” negatives will hit the market when it is ready to rebound from a decline ? New negatives are often the difference between a relatively painless correction and one that hits the “ouch” point.
FISCAL CLIFF:
As I have said repeatedly, I see this debate going until late evening, December 31. There is the possibility of a piecemeal decisions on increased taxes on the so-called top 2%, plus charitable contributions and the “doc” fix, with all else left for the new Congress to debate in 2013.
The extent of political polarization here is so great, I think it has to go down to the wire.
NOTE: Democratic Whip Steny Hoyer and House Majority Leader Eric Cantor announced that the House will not adjourn the 112th Congress until a credible solution to the fiscal cliff has been found. The House was scheduled to adjourn on December 14.
APPLE (AAPL: $518.67)
Yesterday, I said I expected AAPL to go lower, but would bounce to $521 in early trading before heading lower with a spike down to $472. It hit $518 yesterday with a fairly strong close. Based on that, and pre-open trading, I am raising my resistance to $528.
If a 25% 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 a 26% plunge from September’s $705 high is an adequate discount justifying a “buy.”
I think AAPL needs more work before a significant upturn develops.
Breaking support at $510 would signal serious weakness and increase odds of a drop below $500.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB – $26.78): No change from Monday.
Whether FB got hit by the 156 million post-IPO lock-up shares that became eligible for sale Friday is not known at this point ?
Friday, I noted it had to break $28.35 to run across $29 and a break above $29 paved the way for a move to $30.60. It got stopped at $28.34, then turned down.
I still feel the bulls have the edge, but Friday’s action suggests FB needs to consolidate its one month, 50% surge. Risk here is a drop to $24.68 – $25.30.
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: This is a big week for economic reports. 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.
TUESDAY:
Housing Market Ix. (10:00)
WEDNESDAY:
Housing Starts (8:30)
THURSDAY:
GDP (8:30)
Jobless Claims (8:30)
Existing Home Sales (10:00)
Philly Fed Svy (10:00)
FHFA House Price Ix.(10:00)
Leading Indicators (10:00)
FRIDAY:
Durable Goods Orders (8:30)
Personal Income/Outlays (8:30)
Chicago Fed. Nat’l Activity (8:30)
Consumer Sentiment (9:55)
Kansas City Fed. Mfg. Ix. (11:00)
*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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