This week, the market suffered heavy technical damage when support at SPY $143 was breached. It tried to rebound yesterday morning, but the selling pressure was too great. By the end of the day, stocks slipped into negative territory.
A couple of bullish events will help the market tread water today. Microsoft released Windows 8 and a new mini tablet. Apple and Amazon will post numbers after the close. Both companies have a history of beating estimates.
The earnings overnight were mixed, but there was more good news than bad. Guidance has been the biggest concern. Q4 estimates are lower than expected. Many companies have stated that the quarter has started off slow and conditions continue to slip.
Durable goods orders and initial jobless claims have been volatile and in both cases we are reverting to the mean. These releases did not have much of an impact this morning.
Tomorrow’s GDP number is expected to come in at 1.9%. I believe that is a lofty estimate and there is room for disappointment. The economic releases will crank up next week (ISM manufacturing, ADP, official PMI’s and the Unemployment Report). In general, domestic activity has been decent.
Credit conditions in Europe remained stable and economic conditions in China are improving. These two concerns have temporarily been resolved.
The fiscal cliff is weighing on the market. Politicians had 18 months to do something about it and this will come down to the wire. Nothing will get done ahead of the election. Congress will only be back in session for a couple of weeks and then they will disappear for Thanksgiving. It will be tough to get anything passed during the lame-duck session.
We’ve seen how nasty this process can get. Corporations held off on investment decisions during last year’s debt ceiling debacle. Standard & Poor’s took notice and they lowered our credit rating.
The fiscal cliff is important because it could send us right into a recession. I’ve heard some analysts forecast a 5% drop in GDP if all of the provisions are implemented.
Two weeks ago, the market fell into a pattern where it opened on its highs and closed on its lows. This price action is very bearish and I suspect we will see the same next week.
Once Apple and Amazon release earnings, some air will be let out of the balloon. A weaker than expected GDP number tomorrow could spark selling ahead of the weekend.
I believe support at SPY $140 will be challenged next week. The recent sell-off was a warning. Asset Managers are not worried that they will miss the year-end rally and the bid will be passive.
Look for choppy price action until the elections. We could get a small rally if Spain formally requests aid. The election results could also result in a small rally. Unfortunately, the fiscal cliff and cautious guidance will keep a lid on the market.
I am keeping my size small and I will short rallies once they stall. Uncertainty has sparked profit taking and I believe the selling pressure will continue.
The market will establish an early high. We might not sell off with AAPL and AMZN on deck.