I still believe we will get the framework of a cliff “deal” by 10:45 tonight. Whether the market celebrates in anticipation today or Wednesday, I believe that rally would be a fake out pursuant to a slide in stock prices over the next 3 to 4 months.
I would be more positive if the stock market were in a tailspin and down 12% from here as we approach the edge of the “cliff” tonight.
Simply stated, I prefer buying in face of adversity when stocks are getting hammered, as was the case in early March 2009, but with the market only 3% off its December highs – the risks are too high.
The perception has been over the last two years that this country cannot be governed. That is not a condition that drives stocks higher.
Change that, and the bull market can begin another big push, one that brings the individual investor back and ramps up speculation, which unfortunately would mark the end of the big bull that started nearly 4 years ago. That is traditionally the final phase of a bull market, absent, to-date. It will happen, I see a nasty consolidation in the interim.
Our economy is picking up steam, but a lot of uncertainty about decisions (or the inability to make decisions) in Washington will be a drag on sentiments. A debt ceiling debate looms.
Many problems accompany a failure to avoid sequestration, even though Congress can alter its adverse impact with legislation after the fact.
My summary of prior positions below sums up my analysis of the current political/stock market interaction as we enter the deadline day.
S&P 500: 1402.43
Nasdaq Comp.: 2,960.31
Russell 2000: 832.10
Monday, December 31, 2012 (8:50 a.m.)
SUMMARY OF PRIOR POSITION:
I have repeatedly warned readers not to buy the news of a deal that would prevent going over the fiscal cliff (sequester), explaining that a sharp rally would be followed (possibly the same day) by a plunge in stock prices.
I have also held that I believe a last minute deal would be made at 10:45 December 31 on a framework of a deal, enough to avoid sequestration with details worked out by the new Congress in 2013.
If sequestration is opted for, I said it would be intentional to enable Norquist Republicans the option of voting for tax decreases, rather than tax increases except for 2% of the high-end taxpayers.
I also warned of Congressional brinkmanship in early 2013 over raising the debt ceiling which is expected to be hit shortly, but which can be extended for a couple months by employing “extraordinary” measures. These bills would be ones that have already been approved and contracted for, not new spending, comparable to bills that were incurred a month ago that are now due.
If Congress votes to avoid sequestration, I expect the market to rally sharply at the open of the next trading day, even “gap” up in price. I expect the rally to be a fake-out, followed by a sharp decline in prices.
Obviously, this market is driven by news that we are, or aren’t, going over the cliff. Shortly, the debt ceiling will share headlines with the cliff, as Congress plays its brinkmanship game.
A rally following an announcement of a “cliff” deal would most likely trigger a “gap” open on the first trading day following the news. The DJIA could jump some 178 points in early trading, then give it all back the same day, possibly ending the day off 130 points.
2013 can be a year of great opportunity if the market drops significantly. While the market will take one or two hits, the U.S. economy has recovered from the worst recession/bear market since the 1930s. We survived, and that is huge.
Housing is in recovery mode, increasing homeowners’ “wealth effect,” corporations are flush with cash and hopefully the 113th Congress can resolve key spending issues, setting the stage for a sustainable recovery beyond the current one.
Look to 2013 positively, but have a cash reserve to take advantage of lower prices and new leaders.
APPLE (AAPL: $509.58)
What a slugfest ! But, why not ? AAPL is down 28% in 6 weeks, that’s quite a big discount for this darling of Wall Street.
We have buyers between $501 and $504, however a break below this support paves the way for a possible plunge to $445 – $465, which is a bit of a stretch. Near-term, resistance is $515, but another resistance level starts at $520, then $530. What we don’t know yet is how aggressive institutional buying will be after year-end. Since AAPL is down big in 6 weeks, many money managers may not want to show it as a holding on their year-end reports, but would buy it after December 31 –hmmm. Trader’s buy with a very tight stop sell ? Looks like a good play for an options strategist.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB – $25.91):
FB has had a seller on-balance since mid-December, possibly tax selling (gains for some, losses for others ). It has a buyer before the open. I expect it to attack resistance at $27. Not sure what the source is – short covering or longs. Someone is anxious to pick up shares here.
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.
Note: I am going to list the economic reports will not include the numbers from the last report, since those numbers are often revised significantly 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.
Dallas Fed mfg. Svy. (10:30)
PMI Mfg. Ix. (8:58)
ISM Mfg. Ix. (10:00)
Construction Spending (10:00)
ADP Employment Rpt. (8:15)
Jobless Claims (8:30)
Employment Situation (8:30)
Factory Orders (10:00)
ISM Non-Mfg. Ix. (10:00)
Dec 6 DJIA 13,034 “Fiscal Cliff Announcement Rally to Be a Fake Out ?”
Dec 7 DJIA 13,074 “Stock Market Rally Risky”
Dec 10 DJIA 13,140 “Has a Resolution to the Cliff Mostly been Discounted ?”
Dec 11 DJIA 13,169 “Sell Into a Fiscal Cliff Deal Rally”
Dec 12 DJIA 13,248 “Climbing the “cliff” ? Look Out Below”
Dec 13 DJIA 13,245 “After the Fiscal Cliff We Have the Debt Ceiling !
Dec 14 DJIA 13,170 “The Bond Bubble Will Burst”
Dec 17 DJIA 13,135 “Correction Underway”
Dec 18 DJIA 13,235 “Cliff Announcement Next Monday – Vote Dec. 31 ?”
Dec 19 DJIA 13, 350 “Has Cliff Deal Been Discounted by Sharp, 3-Week
Dec 20 DJIA 13,251 “Weekend Announcement ? Rally Fake-Out Monday ?”
Dec 21 DJIA 13,311 “Deal Before Dec. 31 Still Possible”
Dec 24 DJIA 13,190 “Bear Market 2013 or Just Ugly Volatility ?”
Dec 26 DJIA 13,139 “Don’t Buy a Fiscal Cliff “Deal” Rally”
Dec 27 DJIA 13,114 “ Congress Returns – White Knuckle Time”
Dec 28 DJIA 13,096 “Don’t Buy a Cliff “Deal” Rally – 2013 Rocky”
“Investor’s first read – an edge before the open”
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.