MLR - Premarket Pulse January 3, 2013
A massive relief rally greeted the New Year as the market exhaled a very large sigh of relief, staging one of its largest first-day-of-the-year rallies in history. The reality, however, is that it was difficult for investors to be onboard for such a move since it would have necessitated playing "Fiscal Cliff Roulette" and essentially betting on a binary outcome. Had the House Republicans exhibited more spine, instead of looking at this from a purely political point of view where they have caved into the Democrats wishes for the purpose of making Democrats "own" the economy in 2013 (had we gone over the Fiscal Cliff, the Republicans would likely have been painted by the media and the Democrats as the ones to blame for any resulting economic distress), the market could have just as easily started the year out on a very negative note. In simple terms, the Fiscal Cliff "deal" does nothing more than raise taxes on wealthy individuals and investment, while doing absolutely nothing to cut spending. As well, the future of federal spending will still be debated as the "Debt Ceiling" will come into play over the next two months. Despite all this, the market was still clearly relieved about the somewhat limited tax hikes that went into effect on January 1 compared to what would have been had we gone over the Fiscal Cliff. But with no spending cuts in place, potential credit-rating downgrades from Moody's and Fitch, as well as Standard & Poor's, which already downgraded the U.S. credit-rating once, loom large.
A broad number of stocks gapped-up and broke out yesterday, but many also closed near their lows for the day, or in some cases, as with stocks like Ellie Mae (ELLI) and Lululemon Athletica (LULU), reversed entirely to give up any gains achieved at the open. Two of the stronger-performing stocks on the day were Three D Systems (DDD) and Polyone Corp (POL), both of which gapped up and held their gaps, although DDD closed near the lows of its intra-day gap-up range while POL closed near the peak, far more constructive action although POL is a smaller stock, and the Russell 2000 is surprisingly the leading index currently as it has cleared to higher-highs and its highest close in nearly two years.
With continued government spending "in the bag," quantitative easing remains on full tilt, and intuitively this should be a big positive for gold and silver, but both metals, whle gapping up, could not hold the bulk of their gains on the day and this morning are reversing to the downside. From our perspective, it remains a matter of waiting and watching for proper buy points to emerge in the metals before taking any positions in their associated ETFs, the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV).
While gapping up with the rest of the market, Apple (AAPL) closed mid-bar after approaching its 50-day moving average and actually running right into its 10-week moving average on its weekly chart. AAPL has shown more pronounced weakness than the general market as doubts remain with respect to its ability to continue to turn out ground breaking products. Clearly, the law of large numbers is working against AAPL. At a market cap of over $500 billion, AAPL may be hardpressed to make strong moves from here, as a 50% gain would represent a market cap of over $750 billion for the stock. We continue to view AAPL as potentially shortable as it runs into resistance at the 50-day and 10-week lines, as this action appears to be logical in the sense that it is helping to form a second right shoulder within what is so far a big head and shoulders formation. AAPL, PCLN and ALXN all hit their upside stop-out levels as short-sale plays over the past two days, and only AAPL appears to remain in a shortable position as it has so far not been able to clear its 50-day moving average.
As we see it, there is no reason for investors to pile into the market headlong, but rather consider it more prudent to wait to see how the past two days' of huge, cathartic upside moves in a highly news-driven environment pan out, preferring to test the waters incrementally and in measured fashion.
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