Positive Response to Solution of the Fiscal Cliff

Is the pullback now over? Did the calming influence of those in Washington make everything okay? If so, what about the economic picture? Is QE3 starting to work¬†and the data points are¬†ready to reverse to the positive? The fear of the fiscal budget issues have sent some asset classes irrationally lower, but talk isn’t going to reverse those moves longer term just because five people in Washington had a meeting and now it is all going to be okay. Even if they come to an agreement anywhere near the proposals the annual spending deficit remains well north of one trillion dollars. The current growth in the US economy is a whopping two percent. Unemployment is still north of eight percent. Yes, the market bounced off the oversold conditions on Monday, but nothing has been resolved and if anything we may end up in an even worse fiscal deficit when this is done than we are in today. Thus, take the move on Monday for what it was, a bounce off extreme lows short term. Where we go from here is a product of future growth over time.

Scanning the sectors we find all bounced off the lows. Some up more than others, but all made an attempt to reverse course from the selling over the last two weeks. Technology jumped nearly 3% to lead the S&P 500 index. Energy, Consumer Services and¬†Basic Materials were all up more than 2%. The bounce was broad based and overdue according to many technical analyst. However, the upside challenges still remain in place for now. The challenge with the move on Monday is the gap open didn’t allow for orderly entry points. This leaves the question of how to play the move, or should you play the move? Today should provide some insight relative to the bounce. The fact we jump to the 200 day moving average in one day is faster than expected. The target of 1400 on the S&P 500 index doesn’t leave much room on the upside for the risk. The key is to watch the major indexes activity on Tuesday and make¬†a determination from there. We will update the Watch List today as needed based on the progression of the markets.

The Consumer Services sector was¬†up more than two percent as the retail stocks attempt to meet their respective fourth quarter numbers. In that vein there are plenty of headlines on the current course of action being taken by retailers relative to holiday shopping. Are¬†they ruining Thanksgiving? Since last week this issue has found its way into the headlines. While everyone has an opinion on the subject, the end game is capturing market share of the shopping season. Since retailers do such a large percentage of their business during the holiday season it is important not to lose ground. The online retailers have a distinct advantage in that they can make offers via the internet anytime they want,¬†and¬†do all¬†Thanksgiving¬†Day. Thus, the brick and mortar companies are attempting to get in on the early shopping period. Why not open at midnight? Okay let’s try that this year.¬†Is it wrong? Not for me to say. However, as a consumer I have a choice, don’t go, or go shopping. I didn’t get up for the 4 am sales and I will not be heading to the mall at midnight. If others want to go, far be it from me to stop them. The bottom line is this, if shoppers don’t show up, they won’t be open next year. But, I went past Best Buy on the way home last night and there were already campers setting up for the sales. Crazy? Absolutely from my view. However, the people in line think it is the best thing in the world. And for the retailers it is all about making sales. As an¬†investor, I am all for them making money that will influence the stock price. Everyone is¬†entitled to and opinion, but it is simply that, an opinion. That said, I like the move in retail on Monday, watch for the follow through as investors are still expecting positive holiday results.

Speaking of retailers, Apple jumped more than 7% off the lows on Monday. We had posted a trade opportunity in Apple on our Watch List. The move Monday shows how oversold the stock had become. Our short term target was $573 and the stock closed at $565. The stock is worth tracking from here, but the big gain on Monday was worth taking the short term gain and watching to see how it plays out going forward.

Moody’s downgrade to France from AAA debt should have some impact on Europe today. Watch and see how much. If the reaction is overshadowed by the US markets, it will be delayed, but reaction is coming. Watch the euro as well. FXE broke higher on Monday, but now you have to watch and see how it plays out.

Homebuilders are lagging relative to the bounce on Monday. If the bounce fades watch the sector on the downside. Maybe setting up as a potential reversal play short term.

The surge on Monday was more than expected for one day. We were watching for the¬†opportunities¬† to develop in the market short term, but the move was a gap higher. The challenge is to be patient and see how they play out versus chasing the first move. If they follow through there will be plenty of time to get into positive sectors, but you have to be patient for now. Focus and be disciplined in your approach to this market currently. Don’t assume, and more importantly don’t chase the upside.