Has Market Discounted Possible International Crisis?

George Brooks |

Yesterday, the market answered my question, “Are Bulls Tiring ?” with a solid rise, repeating a pattern of extreme intraday volatility that has run the DJIA up and down 200 points nine times over the last seven days.

This volatility indicates an intense difference of opinion between bulls and bears.

The bulls are heartened by an economy that is gaining traction, though modest, and by the fact Europe’s woes are less than in recent years.

Then too, the bears point to a stock market that has soared 135% in four years ( 13% since year-end) and could use a consolidation/correction. That’s not much help, is it ? - On the one hand this, on the other hand, that. But sometime it helps to step back and let the market show its hand.

TODAY: Possible scenario: Down at open to DJIA 14,490, followed by a bounce to 14,520, followed by a drop to 14,465. The “bounce” should be watched closely. If strained and on light volume, expect another leg down. Here is where the bulls are once again tested. They may step in aggressively after the initial slide down at the open. This is a little wild, but I am throwing it out for the nimble trader to consider. I base this pattern on what we have been seeing over the last 7 days.

Yesterday’s strength tipped the balance slightly in favor of the bulls, though this balance seems to swing daily. Aside from the Cyprus event, we have not had an international crisis for some time, Iran/Syria and North Korea are the best bet if we are to have one. All it would take to put a damper on stock prices is for tensions to rise sharply, fighter/bombers to be scrambled or missiles put on high alert to rattle some cages.

Investor’s first read – an edge before the open
DJIA: 14,559.15
S&P 500: 1,563.77
Nasdaq Comp.: 3,252.48
Russell 2000: 949.82
Wednesday, March 27, 2013 (9:12 a. m.)
CASE for CURRENT LEVEL OF STOCK PRICES:
It is important to note (again) that the stock market has rebounded to the level where the bear market of 2007-2009 began. The difference now vs. then is we are not currently facing the horrendous string of adversities here and abroad we faced then. Real estate is recovering, corporations are sitting on huge stashes of cash, which must soon be spent, employment is improving, and there seems to be a greater willingness in Washington to address problems. Europe is on the mend.
We are not engaged in a full scale war, BUT I wouldn’t rule out U.S. intervention in the supply of aid to Syria from Iran.
SEQUESTER (No, it didn’t go away):
This week will feature some key economic reports (see below). At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them putting them on unemployment at the expense the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
Apple (AAPL: $461.13)
Monday, AAPL hit $469, $2 above my resistance where it attracted a seller. Yesterday near-term support at $461 held, however breaking that would call for a drop to $456. Odds favor a consolidation (sideways-to-down) ranging between $464 and $456.
At less than 10 times earnings, (a 33% discount from the S&P 500’s P/E), customer service second to none, and down 35% from its September $705 high, this industry leader clearly should be attracting more buying. I sense there is some serious money earmarked for AAPL, it is just waiting for a greener light on earnings growth going forward. Currently, the Street appears to expect a big increase in AAPL’s dividend, possibly by as much as 50%. While that would increase its interest as an investment to a wider range of investors, just be aware that dividends are taxed and the price of a stock is reduced by the amount of the quarterly dividend on the ex-dividend day. If the stock is rising at the time, it will go unnoticed, but this is not free money.
I am not long or short AAPL.
FACEBOOK (FB - $25.20) Looks like a fair balance between buyers and sellers, a situation where one piece of news can tip the scales one way or another. FB is now down to the level it hit on Dec. 28, prior to a sharp 28% rally that peaked in a double top in mid-January. At that time sellers started to feed stock out steadily depressing it 22%.
Who is the seller ? Possibly the insiders who were in on the May 16,2012 IPO and couldn’t sell until the “Lock-Up” period expired, the latest being mid-November which released 777 million shares. No way to tell now.
If so, their selling is most likely not due to a dim outlook for FB’s prospects. These people have sizable gains and understandably took them in 2013 rather than 2012.
There is a difference of opinion about FB’s future, suggesting we won’t know who is right for a year or two.
Between Aug. and Dec. last year, a trading range between$18 and $24 developed. That should provide support for FB and a buying opportunity. That’s where a three month tug of war took place between the believers and non-believers.
I am not long or short Facebook.
ECONOMY:
This will be a heavy week for economic reports.
But the Street is heartened by favorable economic data on employment, personal income, consumer sentiment, auto sales construction spending, durable goods manufacturing, and housing.
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: www.mam.econoday.com for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports. The site does a great job graphically illustrating key indicators.
WEDNESDAY:
Pending Home Sales (10:00)
THURSDAY:
GDP (8:30)
Jobless Claims (8:30)
Chicago PMI (9:45)
Kansas City Fed. Mfg. Ix. (11:00)
FRIDAY:
Personal Income/Outlays (8:30)
Consumer Sentiment (9:55)
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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Companies

Symbol Name Price Change % Volume
OFIX Orthofix International N.V. 39.08 0.19 0.49 113,249

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