Is Wall Street Bracing for Another Rally Failure?

George Brooks |

Is Wall Street Bracing for Another Rally Failure?Investor’s first read   - Brooksie’s edge before the open

Tuesday, June 12, 2012        9:08 a.m. ET

DJIA:  12,411.23

S&P 500:  1308.93

Nasdaq Comp.: 2809.73

Russell 2000:  751.01

If you wondered what I meant by “news whipsaw,” yesterday’s market action should answer the question – up 96 Dow-points in the first hour of trading in response to Spain’s request for a 100 billion euro bank bailout, then down the rest of the day to close off 142 points as pundits questioned if that was enough help to solve Spain’s problems.

To make matters worse the early surge broke out above the DJIA May 29 rebound high (12,646), sucking in investors who feared they were missing the boat.

This is what I was referring to yesterday when I wrote that in a news whipsaw market, it is hazardous  to buy in response to news after several up days…”

TODAY: Mixed-to-modestly firm at the open, possibly in response to Federal Reserve Bank of Chicago’s Charles Evans comments that he would support a variety of measures to goose growth in the economy.

Resistance starts at DJIA 12,475 (S&P 500: 1316).A break below DJIA 12,400 (S&P 500: 1307) calls for a further drop to DJIA 12,196 (S&P 500: 1286).

ICSC-Goldman Store Sales for the week ending last Saturday were off 0.7%, however ICSC expects June to show a 2% gain.

FISCAL CLIFF:  

The “Fiscal Cliff” exists because Congress’ Supercommittee was unable (unwilling) to agree late last year on a plan to reduce the nation’s mounting deficits.  Partisan politics prevented action by the November 23 deadline for both Houses to vote on a 10-year deficit reduction goal of $1.5 trillion. The primary sticking point was revenue raising.

Failure threw the issue into budget “sequestration,” whereby automatic cuts to defense and non-defense budgets will be made on January 2, 2013.

Three things will happen at year-end.

The Bush-era tax cuts expire December 31, automatic spending cuts kick in,  and  Congress must decide to approve a debt ceiling increase early in 2013 to avoid default on certain obligations could result in another downgrade in the U.S. credit rating as it did last year when the U.S. government was held hostage to the ceiling increase.

No one expects any agreements to be reached before the November 6, Presidential Election. Most analysts expect hard bargaining between then and year-end.

Tough call. The Congressional Budget Office (CBO) claims the expiration of the Bush tax cuts and automatic spending cuts will have a severe impact on the U.S. economy. On the other hand, extending tax cuts will increase the nation’s budget deficit.

A compromise must be reached. This time there is no room for obstruction.

CONCLUSION: By November, investors will think the press and pols are talking about the  North Face of the Eiger when hyping the  horrors of  the fiscal cliff.

Dire warnings of cuts and no cuts, raised taxes or no raised taxes will  overhang investor sentiment between now and November 6..

Expecting a compromise in late December, the BIG money  may jump the gun and begin buying in September/October as certain institutions and individuals look on in disbelief.

Facebook (FB) – Finally FB got  some positive press.  Laura Martin of Needham & Co. defended her Buy rating and a $40 target, acknowledging the stock has been under pressure due to concern that advertising may not be as effective as projected, Nevertheless, she notes that Oracle (ORCL) and Salesforce.com (CRM) acquired social media companies at higher multiples than FB is selling for. Since FB is the “anchor tenant” for the group, Martin believes it should carry a higher multiple.

That makes sense if FB stands to grow as fast as the companies Oracle and Salesforce acquired.

FB’s biggest problem is technical. A lot of overhead supply was created by the botched IPO, which resulted in lot of potential sellers at higher prices. Spikes in its price will encounter overhead supply, as it did yesterday. FB’s stock needs a big hitter to go public with a big “buy,” something that will prompt short sellers to cover frantically.

I don’t know how much of yesterday’s buying was short covering. That is not an indication of investment interest, just investors taking profits. FB was unable to hold its gain for the day, which would be a very bad sign except for the fact the overall market was in a tailspin.

FB – today: I can see a bounce to 27.45 without news (analyst buy) and aggressive short covering. If the selling picks up, 26.25 is the next stop.

ECONOMIC REPORTS:  With economies in Asia and Europe sagging, the Street is watching to see which direction the U.S. economy will take.

Will this trigger QE3 by the Fed?

TUESDAY:

NFIB Small Business Optimism Index (7:30): Jumped in April due to job creation plans and capital spending.

Import and Export Prices (8:30): Import prices dropped in April 0.5% after a 1.5% jump in March. Oil-based products were a contributor.

Treasury Budget (2:00p.m.): April posted a $59.1 billion surplus, the first in 3 ½ years bringing the year-to-date deficit down to $719.9 billion well below the year ago deficit of $869.8 billion.

WEDNESDAY

Produces Price Index (8:30): April prices fell 0.2% after a flat March. Core prices rose 0.2% after a 0.7% rise in March.

Retail Sales 8:30): April sales rose 0.1% after a 0.7% rise in March.

Business Inventories (10:00): Inventories rose 0.3% in March as sales rose 0.6%. The inventory-to-sales ratio stands at 1.27

THURSDAY

Jobless Claims (8:30): Claims fell 12,000 to 377,000 for the June 9 week.. The 4-week average in 377,750

Consumer Price Index (8:30): Unchanged in April after a 0.3% rise in March. Excluding food and energy, it was up 0.2% vs. the same in March.

FRIDAY

Empire State Manufacturing Index (8:30): The Index rose 10.53 points to 17.09 in May. New Orders were up to 8.32 from 6.48 after a strong increase in shipments.

Industrial Production (9:15):Jumped 1.1% after a 0.6% drop in March.

Consumer Sentiment (9:55): Index was up 3 points in May to 79.3 from April.

*Bloomberg.com

George  Brooks

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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
CRM Salesforce.com Inc 71.33 0.13 0.18 5,816,986
FB Facebook Inc. 128.27 0.18 0.14 18,402,945
ORCL Oracle Corporation 39.28 0.16 0.41 12,861,882

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