Don't Buy a Cliff "Deal" Rally - 2013 Rocky
S&P 500: 1418.09
Nasdaq Comp.: 2985.90
Russell 2000: 837.40
Friday, December 28, 2012 (8:50 a.m.)
I have repeatedly warned readers not to buy the news of a deal that would prevent going over the fiscal cliff (sequester), explaining that a sharp rally would be followed (possibly the same day) by a plunge in stock prices.
I have also held that I believe a last minute deal would be made at 10:45 December 31 on a framework of a deal, enough to avoid sequestration with details worked out by the new Congress in 2013.
If sequestration is opted for, I said it would be intentional to enable Norquist Republicans the option of voting for tax decreases, rather than tax increases except for 2% of the high-end taxpayers.
I also warned of Congressional brinkmanship in early 2013 over raising the debt ceiling which is expected to be hit shortly, but which can be extended for a couple months by employing "extraordinary" measures. These bills would be ones that have already been approved and contracted for, not new spending, comparable to bills that were incurred a month ago that are now due.
Seeking Alpha reports the last time consumer confidence turned as negatively as it has now was in August 2011 in face of Congressional brinkmanship over raising the debt ceiling which led to S&P's credit downgrade.
I would be more bullish in face of mounting hopelessness if the market was in a tailspin at lower prices. It is only down 2% since mid-December and still up 5% since mid-November.
Obviously, the Street believes a deal will be reached before December 31, but confidence is waning.
If Congress votes to avoid sequestration, I expect the market to rally sharply at the open of the next trading day, even "gap" up in price. I expect the rally to be a fake-out, followed by a sharp decline in prices.
Obviously, this market is driven by news that we are, or are not, going over the cliff. Shortly, the debt ceiling will share headlines with the cliff, as Congress plays its brinkmanship game.
A rally following an announcement of a "cliff" deal would trigger a "gap" open on the first trading day following the news. I would expect the DJIA to jump 178 points in early trading then give it all back the same day, possibly ending the day off 130 points.
What's my point ?
That a rally following news of a deal would be risky to buy since most stocks would be marked up sharply at the open, and the early months of 2013 will involve a lot of uncertainty. I usually like to get more bullish as news worsens, I just don't see us at the "I can't stand it anymore" point, not even at the "ouch" point.
APPLE (AAPL: $515.06)
Apple slipped below $510 to $504 yesterday, but rebounded with the market when news of the House convening on Sunday hit the market, turning everything up.
This is a negative pattern, which needs a run across $556 to turn positive.
So, we have buyers between $501 and $504, however a break below this support paves the way for a possible plunge to $445 - $465, which is a bit of a stretch.
If a 27% drop does not attract aggressive buyers at this level with AAPL selling at 11.5 times trailing 12 months earnings, AAPL will go lower.
I do not own, nor am I short Apple's stock.
FACEBOOK (FB - $26.05):
Unable to break out above resistance at $28.35 and under pressure from recent weakness, FB is probing for support. Yesterday, it touched the high end of my support area of $24.50 - $25.50 before bouncing along with the overall market. FB's pattern is slightly negative with overhead building between $27 and $28. It needs a major pick up in buying to reverse this pattern and a move above $28.
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: 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: mam.econoday for details reports on this week's calendar and an excellent recap (plus graphs) of last week's reports.
Jobless Claims (8:30)
New Home Sales (10:00)
Consumer Confidence (10:00)
Pending Home Sales (10:00)
Dec 6 DJIA 13,034 "Fiscal Cliff Announcement Rally to Be a Fake Out ?"
Dec 7 DJIA 13,074 "Stock Market Rally Risky"
Dec 10 DJIA 13,140 "Has a Resolution to the Cliff Mostly been Discounted ?"
Dec 11 DJIA 13,169 "Sell Into a Fiscal Cliff Deal Rally"
Dec 12 DJIA 13,248 "Climbing the "cliff" ? Look Out Below"
Dec 13 DJIA 13,245 "After the Fiscal Cliff We Have the Debt Ceiling !
Dec 14 DJIA 13,170 "The Bond Bubble Will Burst"
Dec 17 DJIA 13,135 "Correction Underway"
Dec 18 DJIA 13,235 "Cliff Announcement Next Monday - Vote Dec. 31 ?"
Dec 19 DJIA 13, 350 "Has Cliff Deal Been Discounted by Sharp, 3-Week
Dec 20 DJIA 13,251 "Weekend Announcement ? Rally Fake-Out Monday ?"
Dec 21 DJIA 13,311 "Deal Before Dec. 31 Still Possible"
Dec 24 DJIA 13,190 "Bear Market 2013 or Just Ugly Volatility ?"
Dec 26 DJIA 13,139 "Don't Buy a Fiscal Cliff "Deal" Rally"
Dec 27 DJIA 13,114 " Congress Returns - White Knuckle Time"
*Stock Trader's Almanac: The new one is out - get it !
"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.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.