Dec. 31 Deal Still Posible - 2013 Tough Sledding

George Brooks  |

Again, you see the “news whipsaw” in action. The DJIA may be down 200 points in early trading, however one optimistic comment about a cliff deal, would trigger a 150- 200 point rally.

I have been expecting the market to either rally ahead of an announcement of a cliff deal, or on the day of an announcement, but to then be followed by a correction in early 2013. That hasn’t changed.

What has concerned me most with the market up sharply in 4 weeks was for readers to get sucked into a big “gap” opening on the day following an announcement of a deal only to see the market decline afterwards.
That is still a possibility.

I still expect a vote by 10:45 December 31, after a lot of “go-no-go” debate. Odds of that happening are a little less now. IMHO, a framework of a deal would address the Bush tax cuts, and certain key spending issues to avoid sequestration, but leave the heavy lifting to the new Congress.
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.

S&P 500: 1,443.69
Nasdaq Comp.: 3,050.38
Russell 2000: 851.67
Friday, December 21, 2012 (9:13 a.m.)

The stock-index futures are down sharply in pre-market trading following news last night that the House wouldn’t vote on the Republican’s Plan “B”.

Since this increases the likelihood of a plunge over the cliff (sequestration), it intensifies the need for more compromise on both sides. Can the framework of a plan be worked up over this weekend, which the market is telling us today it can’t?

Yes, but last night’s action by the House reduces odds that it will.

It would take days to draft any tentative agreement made between President Obama and House Leader Boehner before it could be submitted to Congress for a vote. By waiting until after Christmas, the December 31 deadline becomes more formidable.

Is this part of the bargaining process, part of “selling” concessions to each party’s constituency prior to an agreement ?
Hopefully, however it may indicate these negotiations will NOT reach common ground before December 31, and the process of sequestration will begin January 1.

Sequestration may be the only way certain members of the Tea Party can get “off the hook” in their pledge to Grover Norquist NOT to raise taxes.
If any body is able to find “wiggle room,” it is Congress, suggesting the horrors of sequestration do not have to be as severe as the PRESS wants you to think they are.

But over the near-term, perception trumps reality on Wall Street, and investors are taking no chances – they are selling (for now).
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.

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APPLE (AAPL: $521.84)
I have noted repeatedly, if a 24% 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 these levels are attractive enough to begin serious buying.
AAPL’s pattern is weak. Breaking support at $510 would signal serious weakness and increase odds of a drop below $500, first stop $485.
Near-term, AAPL needs some big buying and a push above $525, or it will test the $510 support.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB - $27.36): No change
FB is still trying to break out of resistance starting at $28.35. The bulls still have the edge, but need heavier buying to break out above $29 en route to the 30s. Based on the last two day’s action, support now rises to $25.50.
An emotional plunge in the overall market can drop FB below $24
Near-term FB needs a break above $27.50 or a slip below $27 is likely.
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: 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.
GDP: Q4 (8:30): Revised higher to an annual rate of 3.1% vs. the last estimate of a gain of 2.7%. Q4 is currently estimated to be a rate of 1% to 2% due to Hurricane Sandy.
Jobless Claims (8:30) Rose 17,000 to 361,000 bringing the 4-week average to 367,750.
Existing Home Sales (10:00): Up 5.9% in November to an annual rate of 5.04 million units. Is 14.6% above a year ago.
Philly Fed Svy (10:00): Up 8.1% in November due to a rebound from Hurricane Sandy.
FHFA House Price Ix.(10:00): Up 0.5 points in October.
Leading Indicators (10:00):Declined 0.2% in November – midway between high and low estimates.
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”

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