Investors continue to worry about the “fiscal cliff”. Why the sudden and renewed concern? It can be contributed to the loss by Romney in the presidential race simply put. There was a misread in many ways by Wall Street and others about the outcome of the election. Thus, we are taking away the valuation that was given by investors in hopes of a different outcome and a different approach to resolving the “fiscal cliff” issues. Now the shift is towards pricing in an Obama fight for higher taxes in route to resolving the issues at hand. That double whammy is being priced in relative to the model that many believe will now be the outcome. Simply put, Wall Street hates surprises and a lack of clarity. They are now dealing with both.
Another big question mark is Apple. The stock closed at $537, down from $702 in September. What has happened? First, they have missed earnings projections two quarters in a row. The rest is speculation on what is happening with their product line and market share. The headlines are full of speculative reasoning, and divided on if the stock is a buy at these levels. Some questions will be answered over the holiday season relative to sales and market appeal, but that is several months away for any reasonable input. The bottom line for Apple is they continue to generate $60 billion in free cash flow per year. If the price continues to fall… at some point the fundamentals are too cheap. Definitely a stock to watch going forward.
Europe remains one of the wild card issues in the market yet again. Greece again voted for further austerity programs to comply with the bailout terms from the European Union. However, the riots started along with all the questions about them remaining in the euro. Throw in comments from Draghi concerning Germany being impacted economically by the issues throughout Europe, didn’t help, not surprising, but it didn’t help. There are still plenty of unknowns about Europe and it is one situation that will not go away anytime soon. Thus, we have to continually look or listen for the proverbial other shoe to drop. EFA, iShares EAFE Index ETF is sitting on support at $52.80. A break lower wold be a negative for the outlook. IEV, iShares Europe 350 Index ETF is in a similar situation at $36.40. Both are worthy of our attention moving forward.
Treasury bonds have come back to life on the building fear in the markets. TLT, iShares 20+ Year Treasury Bond ETF broke above $124.50 resistance and from the consolidation pattern on Thursday. The yield on the 30-year bond fell to 2.76% pushing the price of the bond higher. When fear rises towards stocks, money rotates to Treasury bonds. It is equally important to note that fixed income has been struggling outside of Treasury bonds. High yield corporate bonds are breaking lower with stocks. HYG, iShares High Yield Bond ETF fell below support at $91.80 on Thursday and is worth watching further. IYR, iShares Real Estate Index ETF closed on the 200 day moving average and has been struggling to hold support. PFF, iShares Preferred Stock Index ETF is at support as well. Watch the fixed income sector on the downside with the exception of Treasury bonds.
What about a rally or bounce? Never out of the question and the technical indicators are oversold. However, the sellers have control and any bounce is likely to be met with more selling. How much more is the bigger question? Long or short, the market are a dangerous trade currently. Scanning the sectors shows little in the way of leadership other than on the downside. Gold has bounced off the lows and back above the $1720 level. Treasury bonds, as noted above, have moved through resistance and are moving higher. TIPS bonds moved to a new high on Thursday and remain in a uptrend. Short to intermediate term corporate bonds are in good shape and holding their respective uptrends. Thus, we are seeing the “safe haven” investments take on leadership. This is where we have to watch and make decisions in the short term how to handle the outlook for stocks, bonds and other assets. Rotation is in play short term… even if we find near term support in equities, the downtrend is now firmly in play.