Has the Market Mostly Discounted a Cliff Resolution?

George Brooks |

Has the Market Mostly Discounted a Cliff Resolution?So far, the market is acting as if a deal will be reached before year-end. What complicates the issue for investors is that the perception changes frequently between optimism one day, pessimism the next, what I have been referring to as the news whipsaw.

I think the reason the DJIA is up 5.3% in two weeks reflects expectations the cliff issue will be resolved without major dislocation, which raises the question if an announcement is made, how much has already been discounted in stock prices?

The issue is too complex to be resolved in detail before December 31. Any agreement will have to be in the form of enough of a “framework” to head off the automatic spending cuts and tax increases that would be set in motion on January 1 if no agreement is reached.

That leaves the very contentious issues of spending cuts and who gets cut and by how much for debate in 2013.

That spells uncertainty.

DJIA: 13,140.08
S&P 500: 1418.07
Nasdaq Comp.: 2978.04
Russell 2000: 821.86
(Monday, December 10, 2012 (9:09 a.m.)

It increases the likelihood of a rocky market in Q1 of 2013. Add to that, the strong political cycle tendency for post election years to be bummers* and the odds of a correction increase. It’s too early to get a good fix on what to expect as we enter 2013, but what I am saying hear deserves serious consideration ahead of time.

Resistance begins at DJIA 13,185 (S&P 500: 1,423).
Minor support is DJIA 13,085 ( S&P 500: 1,411)

Good news/bad news on the cliff can change this picture in a heartbeat.

NOTE: The euro-zone has been quiet, but that may change with mounting uncertainties in Italy where Prime Minister Mario Monti is being forced to step down with the likely successor, former PM Silvio Berlusconi, returning. Berlusconi is anti-tax, anti-austerity. His position stands to raise questions about Italy’s ability to resolve its sovereign debt issues.

Thursday, I referred to Apple (AAPL) as an example of a stock that may be under selling pressure by money managers, not wanting to show it as a holding in their year end report, since it has been getting hammered since mid-September.

I pegged support at $525. It dropped to $518, then rebounded to close at $547. Friday, I changed my resistance for AAPL to $557 and indicated it was at risk of testing support at $527 by Monday. It closed at $533.

There is a big difference of opinion in terms of fundamentals for this darling of Wall Street, and I am only focusing on the “technical” action of its stock here.

Its 25% drop from its September 21 high of $705.07, should begin to attract buyers as it probes here for a comfort level. The bears appear to have a slight edge, perhaps enough so, that it can punch below $500 to around $485.

As a rule I don’t cover stocks, but made an exception for Facebook (FB) for the reason stated below. I will track AAPL for a while longer, hoping to help readers navigate this decline and find a bottom.

Its market action reflects the Street’s expectations for the company’s fundamental outlook (revenues/earnings). It appears those expectations are unfolding as I write.

WARNING! (Repeat for new readers)
Again, I want to remind readers of the possibility of a sharp decline in the market following an announcement of a fiscal cliff deal, especially if the market has advanced in anticipation of an announcement.
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. While a basic framework of a deal that averts a plunge over the cliff would be a relief, an ugly hassle of the details – who gets hurt and how badly stands to prompt more uncertainty.

FACEBOOK (FB) $27.49: . There is definitely overhead supply (resistance) between $27.80 and $27.40. This 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 its IPO“lock-up.”

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: 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.
TUESDAY:
FOMC Meeting begins
ICSC-Goldman Store Sales (7:45)
International Trade (8:30)
Wholesale Trade (10:00)
WEDNESDAY:
FOMC Meeting announcement (12:30)
Bernanke press conference (2:15)
THURSDAY:
Jobless Claims (8:30)
Producer Price Ix (8:30)
Retail Sales (8:30)
Business Inventories (10:00)
FRIDAY:
Consumer Price Ix (8:30)
Industrial Production (9:15)

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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AAPL Apple Inc. 113.05 0.87 0.78 36,379,106
AB AllianceBernstein Holding L.P. Units 22.80 0.71 3.21 201,472
FB Facebook Inc. 128.27 0.18 0.14 18,402,945

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