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MLR - Pulse December 6, 2012

The NASDAQ Composite sold off on greater volume yesterday as it closed below its 200-day moving average. The move was due in large part due to Apple's precipitous drop, marking the third distribution day in the index in the last several days. The S&P 500, meanwhile, edged up on higher volume as the indexes showed a stark divergence. The oversold bounce and rally is showing some signs of weakening, although a wholescale breakdown has yet to occur. The Market Direction Model remains on a neutral (cash) signal.

Apple (AAPL) dropped more than 6% on huge volume, an unusually large drop for such an institutional bellwether and its largest price decline in four years. While there was no obvious driver for sending AAPL stock plunging, there is concern that Google's Android platform which should account for around 43% of global tablet shipments in 2012, is catching up with AAPL's share which has slipped from 56.3% to 53.8%. While AAPL's iPad is still the market leader, increasing competition may require AAPL cut prices, thus hurting the company's high margins. Further, there are no new significant products on the horizon for AAPL unless it gets its Apple TV set onto the market sooner than later. iPhone5 and iPad mini were catalysts that drove AAPL stock higher. Finally, there is the obvious technical factor of the death cross, when a stock's 50-day moving average falls below its 200-day moving average. These lines could cross by the end of the week, while the 10-week moving average already has crossed below the 40-week line, resulting in a black cross on the weekly chart of AAPL. A test of the recent 505.75 low may be in the cards as the stock potentially completes a large head and shoulders formation.

The SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) continued lower on slightly higher volume, but managed to close near the peak of their daily trading ranges. Both closed under their respective 50-day moving averages with the GLD coming close to testing its own 200-day moving average. Until and unless the precious metals issue a clear buy signal we are not willing to make any long commitments in these ETFs. As well, any continued sell-off in stocks could easily weigh on and drag down the precious metals as they become nothing more than sources of funds.

We remain cautious with respect to the long side of this market, and we do not discount the possibility of a new downside leg developing in this market even in the face of a Fiscal Cliff compromise which could easily become a "sell the news" phenomenon given the weak underlying economic fundamentals the market is faced with currently.

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