Don't Buy Fiscal Cliff "Deal" Rally

George Brooks |

The Street still holds out hope a plunge over the cliff can be avoided. While the market took a nasty hit Friday, it could have been much worse.
Today, the stock-index futures suggest a slightly positive open as Congress is expected to return to “work” tomorrow.
At this late date, the best result that can be expected is if the Democrats and Republicans agree to enough of a framework of a deal to avert sequestration, with the details to be worked out by the new Congress in 2013.
Whether sequestration is avoided, or not, 2013 will be fraught with uncertainty and I see that as bad for stock prices with a drop in excess of 15% from its May highs by April possible, or DJIA 11,880 (S&P 500: 1,285).
With the U.S. economy gaining traction, a drop of that magnitude would have to be accompanied by bad news on the political front, primarily the perception Congress cannot function in a bipartisan way, which of course would eventually impact the economy.
Which spending cuts and by how much won’t be known for months.
Debate over raising the debt ceiling will surface in January or February. If Congress plays the same brinkmanship game as it played in July/August 2011, the outcome could trigger another credit rating decrease.
If the stock market was down sharply at this point in anticipation of uncertainty, risk would be less, but it isn’t.
It’s still up 6% in five weeks in anticipation of a “deal.”

DJIA: 13,139.08
S&P 500: 1,426.66
Nasdaq Comp.: 3,102.60
Russell 2000: 844.79Wednesday, December 26, 2012 (9:06 a.m.)
CONCLUSION:
Look for the “news whipsaw” to call the shots, up on optimistic comments, down on pessimistic ones.
I still expect an agreement of sorts by 10:45 p.m. December 31.
Whether that is preceded, or followed January 2 by a rally, I expect it to be short-lived and followed by market weakness.
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.
TODAY:
Resistance is DJIA 13,186 (S&P 500:1,432).
Support is DJIA 13,120 (S&P 500: 1,422).
Breaking that calls for a drop to DJIA 13,035 (S&P 500: 1,415) near-term.
We are in a highly news sensitive market. These levels can change quickly; it only takes a comment by someone at high levels.
APPLE (AAPL: $520.16)
AAPL rebounded Friday off support at $510, raising hopes that a breakdown below $500 isn’t imminent.
Monday’s action was neutral with AAPL falling back after failing to penetrate my resistance at $524.
A break above that level gives AAPL a shot at $529 - $534.
Support is $514. Breaking that would bring $500 into play.
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.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB - $26.93):
Unable to break out above resistance at $28.35 and under pressure from weakness in the market during the last four days, FB is now probing for support. It found some at $26.20 Monday but volume was light due to the holidays, so that level is suspect. Risk here is $24.50 - $25.50.
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: 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.
WEDNESDAY:
S&P Case-Shiller Home Price Ix (9:00)
Richmond Fed Mfg Ix (10:00
THURSDAY:
Jobless Claims (8:30)
New Home Sales (10:00)
Consumer Confidence (10:00)
FRIDAY:
Chicago PMI(9:45)
Pending Home Sales (10:00)
George Brooks
“Investor’s first read – an edge before the open”
sensiblesleuth@gmail.com

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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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