Debates, Fiscal Cliff, Election Creates Uncertainty for Wall Street

George Brooks  |

The broad-based S&P 500 is up 116% from its early March 2009 bear market bottom, so there is risk in buying stocks, especially in face of uncertainties and the negatives of a recession abroad. Yes, bull markets climb a wall of worry, but this one has done a lot of climbing already.

Thanks to the Great Recession and the Fed’s efforts to generate a recovery with QE1, 2, and 3, paltry interest rates on “safe” investments offer a poor s alternative investment. A 5-year CD returns 1.38%, a 6-month only 0.47%. A 10-year Treasury Bond yields 1.625%, a 3-month T-Bill 0.005%.

The 10- and 30 year Treasury Bonds yield 1.625 and 2.750, respectively, but there is a risk of their value dropping when interest rates rebound.

Investor’s first read - an edge before the market opens
DJIA: 13,482.36
S&P 500: 1445.75
Nasdaq Comp.: 3120.04
Russell 2000: 840.51
(Wednesdayy, October 3, 2012 (9: 09 a.m.)

I have been dead wrong on this premise, so far, but all bubbles burst, and mostly at a time no one thinks they can. Every major nation has undertaken efforts to stimulate their economies.

At these levels, it only takes a modest drop in a bond value to erase several years of low interest rate return.
When will the economic recovery gain enough traction to prompt an increase in interest rates? Economic recoveries take longer after a severe recession, but rebounds in the housing and auto industries improve the odds a general improvement in our economy could be closer than most people think.

The BIG money will anticipate an acceleration ahead of the news, and that is when I expect the bubble to burst. All major economic powers are trying to either avert a recession or to generate swifter economic recoveries. The Fed is no exception. It will not be able to keep interest rates at historic lows when the economy picks up steam.

CONCLUSION – Investors in long-term bonds (funds) should sit close to the exit. Stocks are in a holding pattern, with the major market averages seeking a comfort level with institutional buyers on the one hand and nervous sellers spooked by looming uncertainties (fiscal cliff, the election, and prospect for a recession abroad) on the sell side.

Minor support is DJIA 13,438 (S&P 500: 1438), more important support is DJIA 13,360 (S&P 500: 1430). The latter is not a level we want to see broken, as it would suggest a further drop to DJIA 13,210 (S&P 500: 1420).

A sideways-to-slightly down market for several weeks would be healthy, as it would “shake the tree” and clear some of the overhead supply (sellers).

FACEBOOK (FB - $21.99):

Friday: FB looks like it has traced out a double bottom and possibly a “Head and Shoulders” reverse pattern with the potential of returning to the mid-20s. FB must hold above support at$21.70. A break above $22.50 paves the way for a move to $23 - $24.

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.

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.

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