Trading Opportunity Looms - Another Leg Down to Follow

George Brooks |

George Brooks Equities.comBrooksie's Daily Stock Market blog

Thursday, July 28, 2011     9:23 am EDT

DJIA:  12,302.55

S&P 500: 1304.89

Nasdaq Comp.: 2764.79

Russell 2000: 800.53

Finally, the seriousness of this situation is dawning on investors, kind of like the cartoon where the guy walks off a cliff and keeps walking in space until he looks down – then swoosh !

As  recently as Monday, I marveled at the stubbornness of the market in resisting a plunge in face of fear and uncertainty surrounding  the possibility of default, however remote, and a credit downgrade.

 “Buying opportunities just don’t sit there until everyone gets a chance to jump on board,” I noted yesterday.  By then, I had expected the market to be in a tailspin en route to setting up an attractive buying opportunity.  A 200-point drop in  the DJIA suggested the Street was beginning to take this situation seriously.

Expect three things in coming days/weeks.

One, false starts prompted by comments from D.C. about a deal, or about the U.S. government having enough cash on hand to pay bills through August.

Two, a sharp, but short-term buying opportunity, a surge that could carry the markets above the July highs of DJIA 12,753 (S&P 500: 1339).

Three, another leg down possibly to DJIA 10,700- 10,830  (S&P 500 1150).

 Currently, the market is seeking a level where it discounts the likelihood that a reasonable deficit reduction plan will not come out of Congress, that it may miss the August 2 deadline, (but not default)  and the United States will eventually lose its AAA credit rating.

Yes,  we will get an accord, and yes we will get a rebound.

The attractiveness of the rebound will depend on how low we go before the  accord is announced.  The rebound  could provide a great trading opportunity, but that's all.

I AM BEGINNING TO BELIEVE that the  “debt ceiling rally” will be a head fake, one that sucks a lot of investors in prior to a big plunge in stock prices, taking the DJIA down to 10,800 (S&P 500: 1150) with a bottom sometime in September/October.

Listen, I am a darkness before the dawn guy. I  like to get more bearish as the gloom gets thicker. I just don't think the gloom is thick enough now.

The ineptness of this Congress and bone headed behavior of its Tea Party members suggests much of Congress is dedicated to destroying our President, not crafting meaningful legislation.

This irresponsible behavior stands to adversely impact the economy,  and dampen consumer spirits. The divisiveness will persist for 15 months.

Ironically, I expect the Tea Party will destroy the Republican Party.  In time, I expect moderates from the Democratic and Republican Party to break off to form a moderate party where divisions are less pronounced, enabling great legislation, and sound financial decisions, but that is a couple years away.

I know getting into politics will chasse some readers away, but this whole picture has gotten so political, it is dominating the economy and stock market's prospects.

The United States is still the biggest enchilada on earth. As such, it becomes a juicy plum for anyone who gains control of it and the extremist right wing has its cross-hairs fixed on doing just that.

George Brooks

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MBII Marrone Bio Innovations Inc. 2.29 -0.11 -4.58 45,481

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