9:00am(EST)
“We said last week there was a good chance the mini trading range the market had been in was about to crack and all signs were favoring the bears. The move lower from the previous 5-week trading range served as serious resistance and the breakdown from the current trading range could lead to a possible correction if the zombies aren’t careful.
Of course, the big worry as soon as the Presidential Election ended was the Fiscal Cliff and the rhetoric that would come on Friday. The Republicans have made it clear they are against raising taxes on individuals and businesses making more than $250,000 because of the impact it will have on future economic growth. They argue 7 million jobs will be lost.
The Democrats want to raise taxes, implement ObamaCare which is already forcing companies to cut back on employee hours so they won’ t have to offer healthcare benefits, and increase taxes on capital gains and dividends.
Needless to say, this is going to get nasty and it won’t be solved anytime soon. If the zombies can’t come to agreement on nearly $600 billion in spending cuts and tax increases by yearend, the talk is the U.S. economy will go into another recession. Unemployment could surge above 9% by the end of next year, or 20% if you count the people who have given up working that the government doesn’t count.
We aren’t Vegas, but the odds of the zombies pushing the U.S. off the cliff are running at 5-to-1, or 20%, but could increase if Congress drags its feet. There are talks scheduled for this Friday at the White House (Monday or Tuesday was just way too soon we suppose) and Thanksgiving is next week. Given the lines in the sand that were drawn this past Friday, this leaves the earliest we see something getting done is December.
This leaves the bulls in a volatile situation which is only likely to pick up from here on out until these issues are resolved.
As the rest of the world watches our soap opera play out, headlines from across the pond could also come back into play. There were more riots in Greece last week after the country approved additional austerity measures to ensure an upcoming aid payment. The country continues to blow through cash and will try to raise 3 billion euros on Tuesday in an attempt to sell debt through bonds. Why any investor would buy these bonds or why Greece continues to get more money baffles us because they can’t ever pay it back.
Same deal with Spain. The country so far has refrained from asking for an “official” bailout that would trigger bond purchases from the European Central Bank but it could be coming. We aren’t sure how the markets will react to this news that could also hit this week but the ECB wants Spain to ask for a handout so that it will reduce the yields on their bonds.
The fight over money, taxes, and power between the zombies will weigh on the market over the near-term as earnings wind down and the holiday’s comes around. However, we did mention the week before Thanksgiving is usually bullish and the indexes are due for a bounce. It is also November options expiration week and it will only add to the volatility.
Over the past 18 years, the Dow has traded higher for the week in 15 of them. However, Monday’s have been bearish 7 out of the last 12 during November option expiration week with a nasty loss of nearly 3% in 2008. The index fell from 8,497 to 8,273 which would be roughly 350 Dow points at current levels.
Friday November expiration has seen the Dow rally 7 out of the last 9 years with 2008 showing jaw dropping gains. The blue-chips surged nearly 500 points, or 6.5%, after moving from 7,552 to 8,046. We mentioned on Friday some of the wild price swings the Dow endured in 2008 and while we don’t believe the index will see a 3% or 6% single-day drop, it could happen over the next few weeks if there is continued weakness and the finger-pointing becomes middle fingers between the Republicans and Democrats.
While we have penciled in a possible rebound, we still believe our 5% targets for all of the indexes will trigger and we often remind you that once there is a breakout or breakdown out of a trading range there are fluff targets.
From our 10/28/12 Weekly Wrap:
“There are a ton of fund managers that are underperforming the market and some of them have been caught on the wrong side of the recent volatility trying to make up for lost ground. At some point, there could be a bottom and strong rally but we have to be prepared for both cases. It was good to break out of the trading range to the downside but they too can sometimes get “stretched” at the top and at the bottom so we have to realize this as well.
So how low could the indexes go if the 200-day MA’s break and there is panic selling?
The Dow touched a low of 12,035 in early June and the mid-July low was 12,492. The June 4 low for the S&P 500 was 1,266 while the July low was 1,325. The Nasdaq lows were 2,726 and 2,837 in June/ July while the Russell 2000 kissed 729 and 765, respectively”. (END) (from11/11/2012 Weekly Wrap/ Monday Morning Outlook)…
The market started the week off in a tight range and ended flat for the session. It was the calm before the storm as the bears spent the next 2 days hammering the bulls. The major indexes easily tested our mid-October downside targets of Dow 12,600; S&P 1,350; Nasdaq 2,900; Russell (2000) 780 and as you can see from our aforementioned comments from above, our “fluff” targets.
The bears kept the pressure on into Thursday but lower levels of support came into play as there was a slight bounce off the July lows heading into Friday’s Fiscal Cliff talks. The zombies gave the bulls something to nibble on as they acknowledged a deal could be in the works but can the market trust them is the question.
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