Fiscal Cliff Announcement Rally - To Be a Fake Out?

George Brooks  |

Yesterday’s sharp rebound following President Obama’s meeting with corporate executives is a reminder we are still in a “news whipsaw” market that marches to the fiscal cliff’s drumbeat.

Headlines will increasingly feature conflicting reports of “progress” and “no progress” on an agreement to prevent a tumble over the fiscal cliff and all the dire consequences that would follow.

This will trigger sharp moves up and down in stock prices.

To make matters worse, December is a time when individuals sell for tax reasons and institutions dress up portfolios for their year-end reports, ergo a lot of inconsistent moves in stocks that make little sense.

Apple (AAPL) at $538.79 dropped 37 points (6.4%) yesterday and is down in pre-market trading another 5 today. Does an institution want to show it on its year-end report to clients ? It could drop more in 2013.

There is major resistance to the upside at $567. There is some support just below $525, but a drop to $465 is not out of the question, depending on whether analysts pile on with negative forecasts, chasing a lot of investors to the sidelines.
DJIA: 13,034.49
S&P 500: 1409.28
Nasdaq Comp.: 2973.69
Russell 2000: 820.60
(Thursday, December 6, 2012 (9:09 a.m.)

I think that both solutions for the cliff on the table are far enough apart to enable both parties to make concessions and find common ground, unless the tea party splits the Republican Party’s ability to agree to a solution acceptable to the Democrats.
Nevertheless, if we go over the cliff, I think it would be by design to facilitate a deal shortly after with no damage done to the majority of Americans.

Again, I want to remind readers of the possibility of a sharp decline in the stock market after a deal is announced. Such a decline would be greater if the market is up prior to a deal, then rallies sharply when the announcement is made.
Smart money often “sells into the news.”

The fiscal cliff is is gaining huge visibility, and is now being discussed everywhere by everyone. An announcement would bring relief and excitement and could trigger sudden emotional buying with a “gap” open for the market. Gap opens are often dangerous to buy, since an investor often pays the high for the day. If it’s a fake-out and the market drops, the loss is even more painful.

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Yesterday, I referred to the 15% plunge that followed the August 2, 2011 announcement of an agreement to raise the debt ceiling, which accompanied the Budget Control Act of 2011, which avoided U.S. default on certain obligations, and which set up the not-so-super committee and ultimately led to today’s fiscal cliff.
That could happen again, since Post election years (2013) have a strong tendency for being downers.*

The reason: Politically, it is a great year for making unpopular decisions, since there are 3 years until the next presidential election. It looks like there are a host of unpopular issues on Congress’ plate going into 2013, so beware!

Presently, I see Congress taking this down to late December 31 with a framework for a deal worked out pursuant to the details hammered out by the new Congress next year.

So far, the market is acting as if a deal will be reached before year-end. IF THE PERCEPTION CHANGES, THE MARKET IS GOING SOUTH SOON.
FACEBOOK (FB - $27.71): . The $27 - $28 area represents a longer term resistance than those in the last 3 months, since the stock has risen to an area where it broke down sharply in July. While FB recently broke up through $28 to $29, it slipped back and should have trouble moving up past $28.60. Bear in mind this is December and some institutions want to show FB in their Annual Reports now that it has rebounded from the teens, so there will be some buying. At this level, it may encounter some of the 773 million shares from “lock-up” that came out of its IPOs.

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.

*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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