The pressure on Washington’s pols to offer solutions to the shutdown/debt ceiling crisis is intense. Expect a rally in the market in anticipation of an announcement starting as early as late morning after an attempt to sell off.
Just how far a rally can extend depends on how quickly the opposing party rejects the idea. While a re-start to government operations, is likely to come first, I think the debt ceiling decision goes down to the wire.
Resistance to the upside starts at DJIA 15,230 (S&P 500: 1,704). Both the Nasdaq Comp. and Russell 2000 have held up well, but they too will break down in face of another plunge in the DJIA and S&P 500.
The risk for investors should be obvious. If you don’t buy you may miss a huge opportunity. . If you buy the rally, you could get crushed by a failure and a harrowing plunge as solutions are rejected and hopes are dashed.
NOTE: all this suggests I am one of those perennial doomsters. Not so ! Since my March 10, 2009 “buy,” I have been mostly bullish with one of the few exceptions being my July 29, 2011, “Avoid Debt Ceiling Rally –Will Be a Fakeout,” which preceded a 12% plunge in 9 days.
DON’T CROSS THIS LINE !
There are certain lines you do not cross, unless your intent is hostile. The obvious line capturing headlines today is the debt ceiling increase which has nothing to do with new expenditures and everything to do with paying obligations already approved.
This is the second time the White House and Congress have gone to the brink of failing to raise the debt ceiling. The last time was July/Aug 2011 when a last minute agreement (under duress) headed off the first ever U.S. default, but not a 14-day, 17% plunge in the stodgy Dow Jones industrials.
How big is 17% in the DJIA today ? How about 2,500 points.
The debt ceiling should be raised immediately and unconditionally and never be a political issue again.
The fact the debt ceiling is a bargaining chip today is the reason for my concern.
CONFIDENCE in the present and foreseeable future is the chief determinant of the level of the stock market.
It is both the glue that prevents complex markets from imploding, as well as the driver of economic and stock market growth. All that other valuation crap ( dividends discounted, least squares, price earnings ratios, etc.) is irrelevant compared to confidence.
The ability (willingness) of the United States to honor its commitments is the last line of defense between survival and a CRASH in the economy and stock market. Default would clearly downsize the government, but also the economy and everyone’s net worth.
WHAT WILL WASHINGTON DO ?
I don’t know. That scares me, and I don’t scare easily. Common sense says a deal will occur before the Oct. 17 deadline. But where is the common sense in all this ?
I think you have to accept the possibility of a CRASH (however remote and illogical).
In 2008, the unthinkable happened as the most prestigious, bullet proof names on Wall Street vanished into thin air. ANYTHING IS POSSIBLE, and especially in this hostile political environment.
OK, that’s what can go wrong, WHAT CAN GO RIGHT ?
I expect one or both parties to propose solutions this week, and I expect the markets to rally when they do.
Since I expect a resolution to the debt ceiling to go down to the wire, I expect the rallies to be fake outs.
A BIG CRUNCH THIS MONTH CAN PRODUCE A GREAT OPPORTUNITY TO CATCH STOCKS AT ATTRACTIVE PRICES, ASSUMING ONE HAS SOME CASH IN RESERVE.
Investor’s first read– an edge before the open
S&P 500: 1,676
Nasdaq Comp.: 3,770
Russell 2000: 1,065
Tuesday, Oct. 8, 2013 (9:16 a.m.)
SUMMARY OF MY OCT. 3, “DEBT DEAL TO MISS OCT. 17 DEADLINE…”
(This is necessary since each days post is related to the Oct. 3rd post.)
Thursday, I indicated I believed the debt ceiling deadline set by Treasury Secretary Jack Lew at October 17 would be breached, but a deal would be reached the following weekend, the 19th and 20th. I reasoned that Treasury Secretary Lew can find ways to stretch the deadline several days without defaulting.
I noted I expected the DJIA to hit 12,760 intraday (S&P 500: 1,430) on the Friday the 19th.
In the interim, I warned of a news whipsaw market that will trigger sharp moves up in face of news that suggested an end to the hostilities in Washington, then down when hopes were dashed.
The whipsaw will be triggered by misleading reports of public meetings, speeches, private, behind the scenes meetings, rumors, statements from people who because they aren’t authorized to comment, comment anyhow, rating agencies warning of debt downgrades, and doomsters projecting doom.
I also noted that DJIA 12,760 (S&P 500: 1,430) isn’t that wild, especially if it looks certain the October 17 deadline for raising the debt ceiling will be missed.
The market would be erasing 11 months of market rise and amount to a one-third retracement of the 2009 – 2013 bull market.
Common sense dictates an agreement will be reached before the October deadline, but if common sense was a guide for Congress, this would have been resolved by now without all the self-inflicted wounds.
There are reasons for laws, procedures, decorum, and reasonably predictable behavior by those who govern, not the least of which is stability.
Push it too far and you get chaos.
There are dozens of ways to measure the value of stocks and the market as a whole, with the biggie being CONFIDENCE in the present and future.
Odds favor a resolution of this standoff before it triggers a crash.
It is the reason I expected the announcement of a proposal to settle this mess over the weekend – didn’t happen.
When a crisis gets so ugly it doesn’t seem it could possibly get uglier, it doesn’t (darkness before the dawn). We are getting there, BUT BEWARE, if it becomes apparent to an unsuspecting Wall Street, we are incapable of governing, the stock market will CRASH far beyond my target.
I have been bullish since late February/early March 2009 prior to liftoff. On Sept. 19 (DJIA 15,676), my “Raise Cash for Better Opportunities,” urged readers to prepare for a correction, but it was not until last week’s “Debt Deal to Miss Oct. 17 Deadline………” and projection of a risk to DJIA 12,760 that I saw the risk of a bigger hit.
STOCKS OF GENERAL INTEREST:
Note: Currently, there is the potential for sharp moves in stocks in response to developments in Washington. Under these conditions, support/resistance levels are suspect.
I have added a “debt ceiling crisis” risk level for each stock, a price where these stocks could drop to if the debt ceiling decision goes down to the wire and fear escalates.
Apple (AAPL: $487.75 ) Positive.
The political scene stands to disrupt the normal pattern of trading, but may offer better opportunities this month than business as usual. Market stabilized Friday with AAPL picking up from $479 though volume was light. Yesterday was a nice follow through. Stock benefitted from Jefferies upgrade. There is risk to $470, even $462 in a worsening market.
Debt ceiling crisis price: $457 – $462.
Facebook (FB: $50.51 ) Positive, consolidation likely.
Raymond James downgrade from strong buy to outperform may put a lid on FB in the $51 – $52 area. Slip below $50 likely.
Debt ceiling crisis risk: $46.50
IBM (IBM: $182.01) Positivebut flirting with turning negative.
Yesterday was ugly as techs got hit. Some support at 52-week low ($181). Break below takes Big Blue to $176, and that’s scary, because it hints of a bear market in the offing. I just don’t think the big picture is ugly enough to justify the pounding IBM has taken. Shouldn’t be this easy. Debt ceiling crisis risk: $175
Pulte Homes (PHM: $16.02 ) Positive, but weakening as Washington dysfunction threatens entire economic recovery.
This is what I refer to as the “ouch” point where a stock drops further than expected and is on threshold of a nasty plunge. Stock should find support between $15 and $15.50. If housing recovery is at risk, PHM goes to $12.50 – $13.
Debt ceiling crisis risk: $12.80
First Solar (FSLR:$43.74 ) Positive, but needs a rest.
Can extend up move to $46 – $47, market permitting. This one swings widely – two points at a time, so $42 – $43 possible before bounce. Support is $42
Debt ceiling crisis risk: $37.20
Target (TGT: $ 62.68 ) Negative.
Attempt to base failing. Seller still there and getting aggressive. Drop below $60 possible Resistance $63.00. What is the message here ? Consumer temporarily tapped out ?
Debt ceiling crisis risk: $59.60.
Hewlett-Packard (HPQ: $20.93 ) Negative.
May break below $21. Really needs some institutional support – positive research report – aggressive bargain hunter ( if justified). Great bargains usually don’t just sit there letting big buyers in to buy all they want without moving the price up. Break below $21 suggests drop to $19.
Debt ceiling crisis risk: $17.90
EBAY (EBAY: $54.57) Positive.
Even EBAY is feeling heat.
Can slip to $52.70 – Debt ceiling crisis level now $51.
Amazon (AMZN: $310.03 ) Positive.
Rebound impressive after Thursday’s rally failure, attesting to the strength of AMZN which in a good market looks a lot higher. For now, AMZN must cope with a weak market which can take it down to $303.
I do not own, nor am I short: AAPL, FB, IBM, PHM, FSLR ,TGT, HPQ, EBAY, AMZN.)
ECONOMIC REPORTS: A light reporting week shaping up. Some reports will be delayed due to shutdown, though Federal Reserve based reports and private sector reports won’t. The economy is not currently center stage, though the deadlock in Washington will hurt the economy and confidence and business decisions going forward.
For a detailed account of past and current economic reports, including charts go to: mam.econoday.com – www.mam.econoday.com
Consumer Credit (3:00) Auto purchases powered a 13.6 billion increase in Aug. credit after a $10.4 billion increase in July.
NFIB Small Business Optimism Ix.(7:30) PROJ.: Index Sept. 93.5 vs. 94.0 Aug.
International Trade (8:30) PROJ.: Aug. -$40.0 billion
JOLTS (10:00) Jobs Opening and Labor Turnover Svy: PROJ.: Aug. 3.725 million vs. 3.689 July.
Fed’s Pianalto speaks (12:25)
Fed’s Plosser speaks (12:30)
Wholesale Trade (10:00) PROJ.: Aug. + 0.4 pct
Jobless Claims (8:30) PROJ.: week ended 10/5 310,000- vs. 308,000 prior week
Import/export Prices (8:30) PROJ.: Sept. +0.2 pct. vs +0.1 pct Jly.
Fed’s Bullard speaks (9:45)
Treasury Budget (2:00)
Fed’s Williams speaks (2:30)
Producer Price Ix. (8:30) PROJ.: Sept. +0.2 pct vs. +0.3 pct Aug.
Retail Sales (8:30) PROJ.: zero gain Sept. vs. 0.2 pct gain Aug.
Consumer Sentiment (9;35) PROJ.: Index Sept. 75.0 vs final Aug. 82.1
Business Inventories (10:00) PROJ.: Aug. +0.2 pct.
Sep 20 DJIA 15,636 “Raise Cash for October Opportunity”
Sep 23 DJIA 15,451 “Can a Normal Correction Become a Bigger One ?”
Sep 24 DJIA 15,401 “Opportunity Looms as Storm Clouds Form”
Sep 25 DJIA 15,384 “Brinkmanship Starts – What to Do”
Sep 26 DJIA 15,237 “Street Not Worried – Yet Should You Be ?”
Sep 27 DJIA 15,328 “Prepare for an October Buying Opportunity”
Sep 30 DJIA 15,258 “Makings of an October Buying Opportunity”
Oct 1 DJIA 15,129 “Now the Scary Part – the Debt Ceiling – Default ?”
Oct 2 DJIA 15,191 “Potential for a Deadline to be Breached”
Oct 3 DJIA 15,133 “Debt Deal to Miss Oct.17 Deadline – Settle Over the
Weekend – DJIA Bottoms Oct 19, 12,760 (intraday)”
Oct 4 DJIA 14,996 “Weekend Proposal on Shutdown – a Head Fake ?”
Oct 7 DJIA 14, 936 “DJIA 12,760 if Oct. 17 Deadline Missed”
“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. Brooks may buy or sell stocks referred to herein.