Weekend Announcement? Rally Fake-Out Monday?

George Brooks |

Weekend Announcement?  Rally Fake-Out Monday?Alternating optimistic and pessimistic news continues to drive the news whipsaw with a sharp rise and decline last week, a sharp rise Monday and Tuesday, followed by a drop of close to 100 Dow points yesterday.

This is normal in face of a widely anticipated announcement about a key economic or political issue.

The market is up close to 7% in five weeks in what I believe reflects a belief sequestration will be avoided.

I have been expecting the market to either rally ahead of an announcement of a cliff deal, or on the day of an announcement, but to then be followed by a correction in early 2013. (This would all be so much easier if I could just access one of those persons who was “speaking on the condition of anonymity, because they were not authorized to discuss…….”) !!!

It would take days to draft any tentative agreement made between President Obama and House Leader Boehner before it could be submitted to Congress for a vote. This is why I think an announcement of a framework of a deal will come over the weekend.
I expect a vote by 10:45 December 31, after a lot of “go-no-go” debate.

Sequestration is possible. Congress can always back-date selected issues as if the deadline wasn’t missed.

DJIA: 13,251.97
S&P 500: 1435.81
Nasdaq Comp.: 3044.36
Russell 2000: 847.87
Thursday, December 20, 2012 (9:06 a.m.)

Most likely, sequestration would be intended to accommodate the vote by the Tea Party members of Congress who need an “out” from their pledge to Grover Norquist “NOT” to raise taxes.

A framework of a deal would address the Bush tax cuts, and certain key spending issues to avoid sequestration, but leave the heavy lifting to the new Congress.

That’s my opinion. Walk around the block and you will likely get a couple other views.

This is a news-sensitive market, making support and resistance levels suspect. Near-term support is DJIA 13,213 (S&P 500: 1428). Resistance starts at DJIA: 13,298 (S&P 500: 1439).1440). Again – a statement about the “cliff” with, or without credibility, can change this.
When it comes, an announcement would be greeted by a “gap” open at sharply higher prices, which I believe would be followed by a sell off, quite possibly the same day. Monday’s market will close at 1:00 p.m.

Uncertainty will continue AFTER a deal. That suggests a sharp decline or choppy, sideways-to-down trend into March/April.
Post-election years tend to be downers* and 2013 should not be an exception. The pols seek to get unpopular issues off their plates in post-election years to clear the way for the mid-terms and even years approaching the presidential election year.

So, it could get ugly.

Why should investors take precautions and raise cash in face of a prospective decline in the market ?
What investors do not want to do is spend the ensuing rebound recouping what was lost in the preceding decline. If they have cash, they have the chance of reinvesting near the end of the correction and make money on the rebound.

APPLE (AAPL: $526.31)
If a 24% drop does not attract aggressive buyers at this level with AAPL selling at 11.5 times trailing 12 months earnings, AAPL will go lower.
Whether we go on to break below $500 and down to my worst case target of $445 - $465 depends on the BIG money. It may think these levels are attractive enough to begin serious buying.

I think AAPL needs to do more work before a significant upturn can be sustained.

Breaking support at $510 would signal serious weakness and increase odds of a drop below $500, first stop $485.
I do not own, nor am I short Apple’s stock.

FACEBOOK (FB - $27.41): No change
FB is still trying to break out of resistance starting at $28.35. The bulls still have the edge, but need heavier buying to break out above $29 en route to the 30s. Based on the last two day’s action, support now rises to $25.50.
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.

Note: This is a big week for economic reports. While the fiscal cliff hogs the spotlight, any sudden weakness in the economy would give Congress and the President second thoughts about sequester and its adverse impact on the economy. I am going to list the economic reports but not include the numbers from the last report, since those numbers are often revised 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.

GDP (8:30)
Jobless Claims (8:30)
Existing Home Sales (10:00)
Philly Fed Svy (10:00)
FHFA House Price Ix.(10:00)
Leading Indicators (10:00)
Durable Goods Orders (8:30)
Personal Income/Outlays (8:30)
Chicago Fed. Nat’l Activity (8:30)
Consumer Sentiment (9:55)
Kansas City Fed. Mfg. Ix. (11:00)
George Brooks
“Investor’s first read – an edge before the open”

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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