Uncertainties Help Bears, Stash of Cash Helps Bulls

George Brooks |

The housing market led the economy (and stock market) down and its improvement is now adding needed support at a time the economy is struggling. While August New Home Starts were flat in August vs. July, the median price of a new home jumped a record 11.2%, the highest since May of 2007. The year over year gain was a whopping 17%, the greatest since 2004. This year, home building is expected to contribute to the GDP for the first time since 2005.

News like this buoys homeowner’s “wealth effect,” which combined with a gain of 115% for the S&P 500 has got to translate into consumer spending and ultimately corporate spending. The corporate cash hoard now runs in excess of $2 trillion!!!

Investor’s first read - an edge before the market opens
DJIA: 13,413.51
S&P 500: 1433.32
Nasdaq Comp.: 3093.70
Russell 2000: 833.92
(Thursday, September 27, 2012 9:16 a.m.)
HIGHLIGHTS TODAY: Big picture, fiscal cliff, stock market correction, presidential election, euro-discord, economic indicators, housing, durable goods, GDP, wealth effect, Facebook

Jobless Claims for the week ending Sept. 22 dropped 16,000 to 359,000 bringing the 4-week average to 374,000. Final Q2 GDP was revised down to an annual rate of plus 1.3% vs. the prior estimate of plus 1.7%. Durable Goods plunged 13.2% in August vs, a 4.4% gain in July. A sharp plunge in Boeing (BA) orders is blamed. Reportedly, orders at Boeing have rebounded. Excluding transportation, Durable Goods were down 1.6% vs. a drop of 1.3% in July.


The rebound in housing will eventually translate into consumer and corporate spending. Presently, its strength is not enough to offset the drag from the manufacturing sector.

At this point, we don’t know how much the softness in global economies will impact our economy.

Stock prices will be seeking a comfort level in coming months, adjusting for known negatives and possibly new ones.

TODAY: The market is probing for a level that adjusts for its July – September surge, as well as uncertainties of the fiscal cliff, economy and the November 6 election.

Expect volatility. Near-term resistance starts at DJIA 13,498 (S&P 500: 1447). Support at DJIA 13,415 (S&P 500: 1430) must hold or a drop to DJIA 13,215 (S&P 500: 1415) is likely, near-term. I am surprised that the futures project a jump of 60 points in the DJIA in early trading this morning. Granted, a token bounce would be normal, but there really isn’t any other place to invest money and that may mean money managers are buying aggressively on pullbacks.

If that is the case, the resistance levels noted above will not stop a rally. While the bears have a bunch of uncertainties going for them, the bulls have institutional investors with a stockpile of cash to invest. As a level of buying power, that stash of cash decreases only if money managers decide to stay on the sidelines or there is an alternative investment. For every buyer there is a seller who then has cash to invest.

FACEBOOK (FB) - $20.62:

Last Thursday, I indicated I planned to discontinue coverage of FB, since I felt I had achieved the goal that I set in May, of offering daily guidance for followers of FB starting at $34 on May 21 with my warning about a drop to the $24 - $26 area, 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 for the stock at $16.88.

On September 4, it hit $17.55. However, I did indicate I would post comments on occasion if I felt it would be helpful, but opt out of daily technical coverage. The current plunge is a test of its September low of $17.55. Initially, it should try to hold above $19.25, though I wouldn’t rule out a new low, since my original target was $16.88 on a selling climax reversal. The fact the tech sector is weak along with the market is not helping.

Wednesday: FB found support at $19.80, but needs to cross $21.25 to reverse a negative pattern.
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 I felt at $34 it was very vulnerable in face of all the misunderstanding and hype.

George Brooks
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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