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MLR - Premarket Pulse November 3, 2012

Comments from Treasury Secretary Timothy Geithner to the effect that the Republicans will "cave in" to tax increases amidst an overall Fiscal Cliff "compromise" has the U.S. futures up nicely this morning as the market's rally off the lows of now three Fridays ago continues. The market has had chances to sell off several times during this rally, but negative news regarding the Fiscal Cliff has ultimately proven to be like water off a duck's back as the market has stubbornly continued to hold its ground. We still do not view this rally as the start of a bold, new bull market phase, although one could consider it a tradeable bounce. Given the steep, parabolic nature of the market's prior decline off the September peak, the bounce back is equally sharp and not be unexpected, but leadership in this rally appears to be coming more in the form of bounces off of prior lows rather than breakouts.

Thus we believe patience should be exercised here as investors refrain from getting aggressive on the long side and instead look for confirmation of a sustainable rally phase. The market's expectation of a Fiscal Cliff settlement combined with a previously much oversold market condition and a seasonally favorable period as "performance anxiety" sets in and institutional investors are forced into the market in order to keep up with the major market indexes provides a continued upward bias in the short-term.

The bounce in the market has seen similar action among former leading stocks that broke down severely with the market, such as Apple (AAPL), shown below on a weekly chart. Note that the stock stalled last week just under the 10-week (blue) and 40-week (red) moving averages, and that the 10-week line has now crossed below the 40-week line in a bearish "black cross." As the stock moves up here towards the 600 level, we would be alert to a possible short-sale trade on AAPL if the market rally begins to falter. As a big-stock market-stock, AAPL should be watched closely as a barometer for the general market.

Precious metals ETFs, the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) both headed lower on higher volume, but the SLV has managed to hold its 50-day moving average while gold is finding physical buying demand just above the 1700 level where it has found support over the past couple of weeks. As we approach the fiscal cliff, this will likely create added volatility in the general markets as well as these ETFs. SLV has experienced some heavy volume selling but has held its 50-day moving average. The long-term precious metals are still quite intact, and the best and worst that we see in the metals is the fact that they both remain in more than one-year sideways consolidations. Over the past 12 years, such long consolidations have always led to breakouts to new highs, and in the present we consider more a matter of "when" rather than "if" the metals break out again, and we continue to look for a clear buy signal before trying to aggressively play any new upside breakout and trend in silver and gold.

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