11/18/12
Welcome
to this week’s edition of the Lewison Letter. The Dow finished lower by about 2% and the S&P closed
down 1.5%, despite the strong rally on Friday. It was really a tale of two types of politicians this week
and lets start first with Obama.
On Wednesday, Obama held a press conference where it wasn’t so much what
he said, as to how he said it.
Obama took a “putting his foot down” tone in talking about the fiscal
cliff, which caused the S&P to drop about 20 points or 2.5%. On Friday, House Speaker Boehner,
Senate Majority Leader, Harry Reid and House Minority Leader, Nancy Pelosi,
came out and showed a unified front with a positive overtone, and the S&P
rallied from its lowest level since July 26 (1343) only to close up 6.55 points
at 1360, a whopping 2% off the low.
So whom do we believe…Obama and his market dropping rhetoric or Boehner,
Pelosi and Reid and their market saving unified front?
There
is no question that Friday’s price action was a key reversal and cannot be
ignored. Anytime the stock market
drops to make new lows, only to bounce back immediately that same day to close
at the highs for the day, you have to respect that price action. Before I get to the technicals, let’s
revisit the fundamentals in this market right now. Friday’s meeting between Obama and Congressional leaders
seemed to go better than planned and anytime something is better than expected,
stocks rally, as worst case scenarios are always priced in first. But at the same time, what did Boehner,
Reid and Pelosi really say that we didn’t already know? Boehner said he believes they can solve
the fiscal cliff, Reid said they understand what the problem is and they have
the cornerstones to work something out, and Pelosi said it was a constructive
meeting and they have to work something out. Perhaps the only real news that came out of Friday’s meeting
was that talks were constructive, and “hope” of a debt deal alone seemed to be enough
to rally 20 S&P points…and hope is never a reason to buy stocks. The
markets are also dealing with tensions between Israel and Palestine, a European
crisis that just won’t go away, a rising dollar, high unemployment and
corporate profits coming in much lighter than expected. While I have no doubts a deal in
Washington will get done before the end of the year, it will still be a while
before that happens and with more negative news than positive, I am looking for
the market to continue to trend lower.
Now
to the charts…Friday’s bullish price action resulted in a bull hammer, price
action in which the market opens, trades lower, often times to a new low, only
to rally back and closer higher on the day. This candlestick chart formation is often times a key
reversal day and signals overwhelming demand at the lows that indicate a bottom
has formed. Ordinarily I would say
that it would be time to buy against that level, however, this price action was
created by an outlying event (Boehner, Reid, Pelosi), not a technical level,
and therefore cannot be trusted.
As I mentioned previously, I see no reason to jump all in at this time
and reiterate that I am looking for a drop to S&P 1315, where there is
actually technical support in the market.
Also, it’s important to note that Friday’s close at 1360 is actually a
point of resistance to the upside.
If you connect the 52 week low of 1159 from last November, to the low on
June 4 this year at 1267, and carry that line out, it leads to 1362, which
happened to be Friday’s high.
While it would not surprise me if the market had another day or two of a
relief rally, I fully expect that uptrend line to hold, and you should look for
another move lower over the next couple weeks.
I
do want to reiterate that if you are looking to buy in this market, do not do
so all at once. Identify high
quality stocks that have been unfairly hit, and buy in blocks until 1315, where
I recommend buying aggressively.
While I think Apple is getting close to a “buy of the century,” I would
wait for a move back down towards $500 again as I think the stock could ultimately
pull back to $493.87. I also love
Starbucks and Dunkin Donuts (Starbucks more for long term growth especially for
their recent acquisition of Teavana), Amazon, Macy’s, Visa, Union Pacific,
Petsmart, Cummins and Ford for long term plays, and CVS Caremark, just to name
a few. Be careful buying this
week, as there will be light volume going into the holiday.
Full disclosure: I currently hold no open positions, but will be
selling the S&P on rallies and buying US Treasuries on dips.
Jeff Lewison
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