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Muddied Waters – News-Prompted Breakout a Potential Fakeout

Brooksie's Daily Stock Market blogWednesday, September  21, 2011    9: 15 am EDTDJIA: 11,408.66       S&P 500: 1202.09One eye is on the Fed, the other on Europe.Concern  that a

Brooksie’s Daily Stock Market blog

Wednesday, September  21, 2011    9: 15 am EDT

DJIA: 11,408.66       S&P 500: 1202.09

One eye is on the Fed, the other on Europe.

Concern  that a decision on Greek aid will be postponed until next month upset buyers yesterday, erasing the day’s gains and reversing a 6-day rally that stands to keep the market averages locked in a sideways consolidation range. The next aid package for Greece  is dependent on an assessment that will be made by the European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF) early in October.

Another temporary resolution of the euro-zone debt crisis is likely, ergo, continued uncertainty. 

Unless the Fed coughs up a big surprise today with its proposal to foster a stronger economic recovery and a decline in our nation’s unemployment rate, I don’t see a sustainable surge in stock prices, based on its action.  Every known option available to the Fed has been discussed ad nauseum, so it will take some real creativity to launch a surge like last year’s September – May run.

Stocks are reasonably valued, and clearly a more attractive alternative than long- or short-term bonds, money markets, CDs etc…….assuming we don’t get another downleg.

Right now, the stock market cannot decide whether the next major move will be up or down. If the light were bright green, the institutions would be stampeding in.

There are just too many balls up in the air, some of which can come down to crush investors. This is even a difficult market for the nimble trader, since moves in either direction are too brief to enable a profitable entry and exit.

There is a possibility of another leg down, below the August lows of DJIA 10,588 and S&P 500 1101. Depending on the severity of the news that accompanies that decline it could drop below DJIA 10,000 (S&P 500: 1050).

This market action reminds me of the consolidation in stock prices in early 2008, one which featured an upside breakout before a harrowing  plunge as the bear market developed a full head of steam.

However, that’s where the comparison ends, much has been done to shore up liquidity and economic stability.

Sometimes cash is the smart place for funds, even if it isn’t earning a return in excess of inflation. Institutions have a tough time justifying that, because they are getting paid to invest in stocks.  That is probably why the market has held up so well here.

Under these conditions of uncertainty, I would be suspect of a news-prompted upside  breakout of the current consolidation zone (DJIA: 10,600 and S&P 500: 1220), since it could be a fake out prior to another slide down.

12-member SuperCommittee timeline:*

Sept. 22: Deadline for Congressional consideration of resolution of disapproval for first $900 bn tranche  of debt       limit increase.

Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.

Oct.: 14: Deadline for House and Senate  Standing Committees to submit recommendations.

Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction  goal of $1.5 trillion .

Dec. 2: Deadline for committee to submit report and legislative language to President Obama and Congress.

Dec. 23: Deadline for both houses to vote on committee bill.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if  the committee’s legislation has not been enacted.

Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.

Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche  ($1.2 – $1.5 trillion) of debt limit increase.

Fall/Winter 2012: When additional $2.1 – $2.4 trillion of borrowing authority from this law runs out.

Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary to meet spending cuts required by the “trigger.”

George  Brooks

*National Journal


The writer of Brooksie’s Daily Stock Market blog, 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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