Something Has Gotta Give

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Over the past few weeks I have talked about how there is a divergence between the economic information that has come out and the movement of the market. The LEI’s have been improving and the market has been selling off. That type of divergence can only last for so long. Either the LEI’s are going to roll over or the market will find its footing and move higher.

Clearly the angst over the fiscal cliff is producing added pressure on the market. That pressure, in my opinion, reached ridiculous levels last week. I find it hard to believe, especially with the current interest rate environment, that people are going to continue to sell high quality stocks with a high dividend. Indiscriminate selling of a stock because it pays a high dividend, likely the reason it was bought in the first place, can only go on for so long.

After a sharp selloff Wednesday of last week the-powers-that-be in Washington actually cooled things down with encouraging words on the fiscal cliff. No one gets fired up about buying stocks when the financial networks are full of politicians talking on the screen all day. The only way that sort of sight is welcome to the market is when they are saying that they are going to get the heck out of the way soon. Some signs of willingness to compromise sent the markets higher Friday and more buyers came in today to lift stocks off severely oversold conditions.

The move below the 200 day moving averages for the major indexes over the past couple of weeks is adding fuel to the selling. Whenever you are talking about the 200 day moving averages for the major indexes the bears are in control. Any rally attempts by the market will just be selling opportunities until we get back above the 200 day moving averages. 

Economic numbers continue to surprise to the upside. The November NAHB Housing Index data released today greatly exceeded expectations. The reported number of 46 was well above the consensus estimate of 42. This is the highest level for this reading since 2006. Existing home sales came in at 4.79 million against an estimate of 4.70 million. So, a key barometer of the strength of the economy showed things are still going strong in construction.

The technical picture has been overhauled by near term uncertainty associated with the fiscal cliff. If you look at prior issues that had to be dealt with by 12/31 of any year you get a pretty clear idea of how politicians work. Whether it is the extension of Bush tax cuts or some other pressing matter it is important remember T-15. In past crises the powers that be come up with a solution 15 days prior to the end of the year. Strangely enough that coincides with the beginning of the holiday break for politicians.

Here are some support and resistance levels for the S&P 500/Dow/NASDAQ/Russell 2000. It does matter how oversold the market is if the following near term levels give way—selling will intensify: 1342/12,470/2809/762. If the following upside levels are taken out we could see a near term bottom put in: 1365/12,700/2876/780.

About Thomas J Smith CFA