Suddenly, the Market IS Concerned About the Debt Ceiling

George Brooks |

Bloomberg.com’s morning news headlined, “U.S. Stock Futures Decline Amid Debt-Ceiling Concern.”
That shouldn’t be news !

The Street should have known the debt ceiling debate would raise it’s ugly head, but relief that Congress extended most of the Bush-era tax cuts to kick off the new year masked the harsh reality that the heavy lifting on spending cuts and tax reform begins next month.
But first comes the vote on raising the debt ceiling. If not done, certain bills for expenses already approved and consumed will go unpaid, ergo – default and a lower credit rating.
No sweat right ? After all, this “routine” process has been approved 8 times in the last 10 years, 85 times over the last 100 years.
Wrong, The debate in mid-2011 was only resolved a smidge short of default, accompanied by an S&P downgrade in the U.S. credit rating. President Obama drew a line in the sand yesterday, vowing, “What I will not do is to have that negotiation with a gun at the head of the American people.”
That’s not a “line in the sand,” that’s a ravine, and it suggests a bitter, divisive fight between Congress and the administration, not the kind of stuff that nurtures a strong uptrend in the stock market.
Following the debt ceiling debate in Aug 2011, the stock market plunged 12% in 7 days.
TODAY: This is the first day the debt ceiling issue has garnered Page One headlines and had an impact on the futures before the market opens. We will see how seriously the Street takes this looming negative this week. If it shakes it off , the positive momentum that was evident in the early days of January will be renewed. If the market begins to slide, the market is in for a reversal.
This is an important juncture in the market. It’s now “third and long” for the bulls.
DJIA: 13,507.32
S&P 500: 1,470.68
Nasdaq Comp.: 3,117.50
Russell 2000:
Tuesday, January 15, 2013 (9:10 a.m.)
THE MARKET AVERAGES:
The DJIA was up 18.89 points yesterday, but would have been up 32.33 if IBM were unchanged for the day.
The Nasdaq Composite ands S&P 500 were down 8.13 and 1.37 respectively, primarily due to Apple’s (AAPL) drop of 18.55 points.
How so ?
It all has to do with the way the market averages are constructed and the impact certain stocks have on the averages.
The DJIA is price weighted, giving greater weight to the higher priced stocks. Essentially, the price of all 30 industrials is added up, then divided by the average’s “divisor,” which is currently 0.1301826.
To calculate IBM’s impact on the overall average, you divide its price change for the day by the divisor, or $1.75 divided by 0.1301826 to get its impact on the DJIA of 13.44 points.
The Nasdaq Comp. and S&P 500 are market value based with the biggest companies (shares x price) having the greatest impact on the indexes. My estimate of Apple’s drop of $20 is it cost the Nasdaq 11 points and the S&P 500 about 4 points.
A POSITIVE NOTE:
While I am bearish about the early months of 2013, the year can produce a lot of attractive opportunities, just at lower prices.
The U.S. economy has recovered from the worst recession/bear market since the 1930s. We survived, and that is huge.
Housing is in recovery mode, increasing homeowners’ “wealth effect,” corporations are flush with cash and hopefully the 113th Congress can resolve key spending issues, setting the stage for a sustainable recovery beyond the current one.
Signs of an economic recovery are surfacing in China with some forecasters becoming more optimistic about Europe’s stabilization and return to growth.
I see an interruption to the bull market in coming months that started in March 2009, but which has not fully run its course. Individual investors are largely absent, but they will return to buy near the end of the bull market when speculation ramps up. That can be a year or two out.
BOND MARKET:
I was premature in my earlier forecast that the long-term bond bubble would burst, but now feel it has already begun with a top traced out between July and December. U.S. Governments were in demand as a refuge from international chaos. As the tensions from European sovereign debt woes abate, money will flow out of safe havens and into stocks where a better return is hoped for. The short-term bonds are obviously not the problem, but long-term bonds are vulnerable.
APPLE (AAPL: $501.42) At a Tipping Point ?
Last Wednesday, I noted that AAPL was at a “tipping point,” that a break above $555, or below $500 was imminent. Resistance now starts at $504. AAPL needs a big buyer now, this seller(s) are persistent. The first support for a break below $500 would be $468 from which it should rebound briefly to $493, or so. Sometimes big buyers will wait for a break below a key support level to buy “in-size.” The reason ? They can use the increased volume generated by the break of the key support to buy a lot of stock without running the stock up.
Its earnings are scheduled for release on Wednesday, Jan. 23.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB - $30.94): Classic break out and run situation. Resistance starts at $31.36. Support is now $29.32.
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.
As for Apple, well it is a big-name stock that got shellacked in a short period of time, I wanted to help out targeting a bottom as with FB. I do not have a position in FB long or short
ECONOMY:
Note: I am going to list the economic reports will not include the numbers from the last report, since those numbers are often revised significantly 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:
Producer Price Index (8:30)
Retail Sales (8:30)
Empire State Mfg Svy (8:30)
WEDNESDAY:
Consumer Price Ix.(8:30)
Industrial Production (9:15)
Housing Market Ix. (10:00)
Beige Book (2:00) Fed report on Jan 29-30 meeting.
THURSDAY:
Jobless Claims (8:30)
Housing Starts (8:30)
Philly Fed Svy (10:00)
FRIDAY:
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
T.CFW Calfrac Well Services Ltd. 2.95 0.05 1.72 1,581,419

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