I am back earlier than I thought (comments this week will still be abbreviated) because much has changed with the S&P (1402) over the past week. It has (1) broken the newly re-set short term uptrend, (2) broken below its 50 day moving average again [wiggly red line] and (3) appears to have rejected the break above the former upper boundary of a short term trading range .
A word about the latter---our technical discipline’s guidelines for the confirmation of a break of a short term trend is three days. Clearly that is our guideline and it does not always work out that way. The current situation has all the appearances of such a case, i.e. it takes the Market longer to reject a breakout than normal; however, I am going to give it another day or so but making that call.
If in fact, the break to the upside has been rejected, then the former short term trading range is now operative (1343-1424) with interim support at 1395. The lower boundary of S&P’s intermediate term uptrend now intersects at 1378.
As I am sure that you are aware, the reason for the current sell off is the inability of our elected representatives to come up with a compromise on the fiscal cliff. This is not a surprise. I have argued several times that the major imperative for a compromise would likely turn out to be a dramatic decline in stock prices. That said, Friday’s close put the S&P right at its Year End Fair Value---which hardly qualifies the current sell off as ‘a dramatic decline in stock prices’. Hence, if this thesis proves correct, we are in for more downside.
The good news is our Portfolios have plenty of cash.
The bad news is that in the midst of a contentious debate on how much to raise our taxes and not on the real fiscal issue (too much spending), Obama has just approved a pay raise for all government employees. Take a good look at our future, ladies---a power elite that votes itself pay increases which it insists must be paid for by raising our taxes instead of imposing the slightest discipline on itself to manage this country’s budget responsibly.
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