Actionable insights straight to your inbox

Equities logo

Cliff Hanger – News Whipsaw to Roil the Markets

Expect reports of “a deal” on the fiscal cliff, followed to denials to first run stocks up, then take them even lower. It’s the “ news whipsaw,” it’s cruel and can chew a portfolio to

Expect reports of “a deal” on the fiscal cliff, followed to denials to first run stocks up, then take them even lower. It’s the “ news whipsaw,” it’s cruel and can chew a portfolio to bits if an investor gets on the wrong side of its many moves. Fully discouraged, an investor is then likely to miss the turn when it comes.

This stop-and-go action is typical of markets dominated by a single news issue. This time it is the fiscal cliff. Last year, it was the debt ceiling debate in mid-2011 ( “Debt Ceiling Rally to be a Fake out” – July 29, 2011), prior to a 13%, nine-day plunge. This one will also be a cliff hanger. Some “grinding” is needed to size this one up – Buy when a solution appears hopeless, or avoid on an announcement. Opportunity either way, a question of timing and price.

CONCLUSION: Yesterday was a rally failure ! This is what I am referring to as a whipsaw. The market moves up and looks like it has turned. Investors, not wanting to miss the turn jump in. No sooner that they do, the market does an about face.

TODAY: President Obama holds a press conference today at 1:30 and may touch on the fiscal cliff, but not in detail since he will meet with a number of top CEOs at 2:45 to gain input on cliff possibilities.

There is a wild card here. He may have the framework for solution to the cliff and want to run it by the CEOs prior to taking it to Congress. If so, look for a sharp surge in stock prices, one that takes the DJIA across 13,100 (S&P 500: 1408). Yes, that could happen, no one expects it. Time for a decision is short, it would be a good move. So far, not even the BIG money sees it. If it did, I think the futures would be up a lot.

Investor’s first read – an edge before the market opens
DJIA: 12,756.18
S&P 500: 1374.53
Nasdaq Comp.: 2883.89
Russell 2000: 789.00
(Wednesday, November 14, 2012 (9:07 a.m.)

The market may stabilize, even creep up a bit prior to his press conference, but move lower at the close.
This is classic behavior for a market that is floundering in face of uncertainty.
It doesn’t get better than this for a press and talk show hosts following an election to drum up emotions over yet another sizzler.
I expect Congress to be in session until New Year’s eve when I see a tentative deal to be struck, pursuant to the workout of details on debt reduction and some form of tax compromise. No one gets it all their way.

TODAY: I can see my old support level of DJIA 12,735 (S&P 500: 1376) broken, possibly this week with a good possibility of a drop in the DJIA to 12,580 (S&P 500: 1335) in coming weeks.
After yesterday’s market action, resistance is now DJIA 12,814 (S&P 500: 1380).

Expect institutions to do some buying in coming weeks, especially on weakness. They can average out their position at these levels with purchases at lower levels.
What they cannot afford is for the market to run away from them on the upside.
Their buying will stabilize, even bump prices up, at times, but not turn the market, not yet.

The fiscal cliff should have been solved a year ago by the Super-Committee. President Obama and House Speaker Boehner were close to crafting a deal, but political ideologies stood in the way.

Now, it’s deal time, and Obama and Boehner are ready to bring their parties to the beginnings of a solution.

“Beginnings,” meaning enough of an agreement before year-end to delay the deadline until details are finalized in early 2013.
If December 31 passes without a solution, I believe it would be intentional and accompanied immediately by a plan to adjust the Bush-era tax cuts and get certain members of the House off the hook from their pledge to Grover Norquist, not to raise any taxes. Norquist heads up Americans for Tax Reform.

I see the framework of a deal decided on by the “lame duck” (outgoing) members of the House, with the final details worked out by the new membership.

FACEBOOK (FB – $19.86): FB gave back some of Monday’s gain. A big test of its ability to hold above support at $18.85 starts today when 773 million shares come out of lock-up. Yesterday’s volume was 71 million shares.
Will FB drop below $18.85?

The chart is telling me odds have improved it won’t, however overall market weakness could take it lower, along with a host of other stocks.
FB’s ability to move up is complicated by millions of shares coming on the market that could be sold , shares that were in “lock-up” from its IPO.

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, but think my objective here has been accomplished.

George Brooks
*Stock Trader’s Almanac: This is a “must own” publication, loaded with daily, weekly, monthly savvy. It is “the source” for strategies, seasonalities, recurring events, useful stats. Published annually, I have used it every year since 1968. Nothing compares !
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.

A weekly five-point roundup of critical events in the energy transition and the implications of climate change for business and finance.