MLR - Premarket Pulse December 4, 2012

Published : December 4 2012 at 9:21 ET

Both NASDAQ Composite and S&P 500 found resistance at their 50-day moving averages yesterday, reversing to the downside and closing at their lows of the session on lower volume after opening up strongly. The market has been able to hold its gains quite stubbornly during this rally from the short-term low of three Fridays ago, but a contiinued pattern of upside openings followed by downside reversals and weak closes would indicate that the move is losing steam.

Apple (AAPL) which we have cited as a "market stock" that has correlated closely to the general market's top and parabolic downside move off the September peak (AAPL's low of three Fridays ago perfectly matched the market's low on the same day) is finding resistance at the confluence of its 10-week and 40-week moving averages, which roughly correspond to its 50-day and 200-day moving averages, respectively. Google (GOOG) also rallied right up into its 50-day moving average where it turned tail and closed down on the day. If the general market begins to show signs of weakening we would consider AAPL and GOOG reasonable short-sale targets with the idea of using their primary moving averages, such as the 10-week and 40-week in AAPL or the 50-day in GOOG, as guides for upside stops.

The Obama Administration has rejected the latest compromise proposal from the Republican side of the aisle, which again puts in motion "Fiscal Cliff" fears. With the major market indexes up against resistance any deterioration in the Fiscal Cliff argument would provide a logical catalyst for a rally failure at this stage. We still consider this rally to be an oversold bounce, and its magnitude is certainly proportional to the sharp, nearly parabolic downside move that preceded it. We remain cautious on the long side and vigilant for any price/volume action that may bring the short side of the market back into.

A rehash of yesterday's news:

In China, the HSBC manufacturing PMI rose to 50.5 in November which is the first reading above 50 in over a year. Readings above 50 mean expansion. China's stock market has been lagging somewhat over the past year as its growth has slowed which puts lower demand on commodities. A return to higher growth could mean a resurgence in buying interesting in commodities as well as a stronger Chinese stock market. China is the key creditor nation so any moves by China make a substantial footprint. It is not clear, however, that economic improvement in China necessarily translates into the same for the faltering U.S. and European economies.

Greece announced plans to buy back bonds to lower its swelling debt which could be considered a positive for Europe. Ishares S&P Europe ETF (IEV) which invests across a broad range of European stocks has been behaving better over the last few months as its moves in a broad, volatile sideways consolidation over the past 2-3 months.

In the U.S., construction spending jumped 1.4% in October, or nearly triple the 0.5% gain expected by economists. This is cited as a positive for housing, but while various housing stocks have been in uptrends over the last several months, many have recently corrected, though industry group strength is still in the top 3%. We tend to see "positive" housing and construction data as mostly masking the massive amount of shadow inventory that still exists as banks refrain from foreclosing on properties where in many cases owners have not made mortgage payments for two years or more. If banks did allow such foreclosures to proceed apace this would force them to revalue "assets" that they currently keep on their books at "mark to myth" prices. In the meantime, we will watch for a resumption of the multi-month uptrend, though we would not be surprised to see further correction on fundamental grounds.

Fnially, the Institute for Supply Management said its factory gauge fell to 49.5 in November. Anything under 50 indicates contraction and marked the lowest level since July 2009. Expectations were for 51.3. The U.S. economy remains weak, and we consider the lack of any catalysts for strong growth going into 2013 as a difficult backdrop against which one can paint an aggressively bullish case for U.S. stocks.

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