The general market clawed its way back to almost breakeven on higher volume despite being down as much as -1.3% on the day as fears of going over the Fiscal Cliff duel against the hope of a Fiscal Cliff deal. Towards the end of the trading day, news that the U.S. House of Representatives will reconvene Sunday, raisied hopes for a fiscal-cliff agreement and sent the market quickly reversing back to the upside.
With two days left to the Fiscal Cliff deadline, the eleventh hour is upon us, and markets remain nervous. From a purely political point of view, the Democrats could simply let us slow walk over the cliff as they would then be able to blame the Republicans of protecting tax cuts for the "rich" while letting those that are less-than-rich suffer tax increases. Should this happen, Treasury Secretary Timothy Geithner announced Wednesday that he will make sure the U.S. government does not hit its $16.4 trillion borrowing limit on December 31. In normal times, these steps would be in place until the end of February, but Geithner said the expiring tax breaks and spending cuts make any estimates uncertain. Should we go over the cliff, Bush tax cuts would expire and a payroll-tax holiday enacted under Obama would also expire, while some $1.2 trillion in spending cuts would come into force at a rate of about $110 billion annually over 10 years.This would likely push the U.S. into recession sometime in 2013.
Apple (AAPL) flirted with its recent lows yesterday before closing slightly up after the market reversed and pared its losses. AAPL remains a short-sale target using the 10-day moving average at 520-521 as a maximum upside stop. However, the critical move would be a breach of the 500 price level and the neckline in AAPL's head and shoulders formation, at which poiint we would look to be aggressive in shorting the stock. Alexion Pharmaceuticals (ALXN) also rallied up off its intra-day lows yesterday, but the stock remains well below its 50-day moving average at around 95.43. ALXN's neckline in its own H&S formation is down in the mid- to low-80 region. While the market remains highly news-driven, short-sellers have to remain somewhat nimble, but an approach uses news-driven rallies to short into might be a reasonable way to enter short positions in AAPL or ALXN until we are finally able to see how the market reacts if and when an actual Fiscal Cliff deal is in place. The entire Fiscal Cliff debate could simply offer the market an alibi for a rally as it has since late November, but it does not eliminate the significant headwinds that the economy faces in 2013, therefore we would be alert to viewing any rally as something to sell short into for those inclined to do so. In any case, we believe AAPL and ALXN offer two big, former leading stocks that are forming textbook H&S topping formations and which should be on any short-sellers target watch list regardless of what the market does in the short term.