āIām Dreaming of a Green Christmasā
December 17, 2012
by Jeffrey Saut, Chief Investment Strategist, Raymond James
While last week, and this week, often see distortions in individual stock prices due to tax loss selling, Santa Claus tends to arrive the following week. Indeed, the last week of the year, into the first two days of January, has a pretty good track record on the upside with a rally coming about 65% of the time. As stated in previous missives, I expect the same Santa rally this year driven by a āstaged inā solution to the fiscal cliff. Most readers know that I have lived in the D.C. Beltway and have a good working knowledge of how our system works. And while this yearās ārhythmā has a different feel to it, I still expect a last minute solution. That has been my stance for the past few weeks based on this reality. Speaker John Boehner is under intense personal pressure to cut a deal because if he doesnāt he may not be reelected Speaker of the House when the new Congress convenes January 4th. Therefore, he will likely accept the 39.6% tax bracket for high wage earners and then focus the conversation toward entitlements and the debt ceiling. Evidently, I am not the only one thinking this. As the Wall Street Journalās Kimberly Strassel writes:
āSince the President has not sent budgets out (the only one he did send out was voted down 79 to nothing in his own Senate) and he said what would solve the nationās problems was taxing the rich, and weāve said all along the amount of money that you get for this is just a few days of deficits. But since thatās really the only thing that youāve proposed to do and that youāve got a mandate for doing it, and a majority of people say that this certainly is fair ā weāve got a gigantic deficit and the rich have benefitted (directly or indirectly) from the money thatās been spent, so weāll say fine, you can have that ā weāll concede, now the rest of the problems are yours. Youāve said that this will solve the nationās problems ā fine, weāll sit tight and weāve got the debt limit coming up and we will keep following along.ā
If the Washington Waltz does play-out this way, then the Acapulco ācliff divingā exhibition will be off; but if not, the economyās destiny will hang on how the ācontestā is finally resolved.
One sector that should not be affected either way is technology. According to the discerning Don Coxe, of BMO Capital fame:
āThey [technology companies] are self-financing, they have potent balance sheets, they have the patents, the visibility, and they are the best in the world at what they do pretty much, so this is a continuing source of strength for US stocks relative to other global stocks, and will help if we should fall over the fiscal cliff.ā
Those comments were particularly timely given Raymond Jamesā Technology Conference last week. As one particularly keen-witted Wall Street wag wrote (as paraphrased by me):
āThe most significant takeaways from our Tech conference yesterday were that while the broad tone seemed cautious, there were clearly signs of stability on the supply chain with a leading chip distributor calling for positive book-to-bill readings for October, November and the early part of December. Other companies with favorable ratings from our fundamental analysts, like Maxim (MXIM/$29.56/Outperform) and Analog Devices (ADI/$41.35/Strong Buy), also signaled stability versus existing expectations, while SDN (S4C Digital Network) fears and those surrounding Microsoftās Surface products were calmed a few degrees [Microsoft is also favorably rated by our fundamental analyst (MSFT/$26.81/Outperform)].ā
I like the technology sector for many of the reasons mentioned by Don Coxe.
Meanwhile, the equity markets struggled with only 5 of the 15 major indices I monitor closing positive for the week. Those five were the D-J Transportation Average (+1.15%), the S&P 500 Equal Weighted Composite (+0.09%), the two ValuLine Indexes (Arithmetic +0.37%; Geometric +0.30%), and the Russell 2000 (+0.18). The only three macro sectors that closed āupā on the week were: Materials (+1.64%), Telecommunications (+0.50%), and Industrial (+0.30%). The strength in the Materials sector is interesting because it is economically sensitive. Despite last weekās waffling action, by my work the DJIA, DJTA, COMP, and SPX (S&P 500/1413.58) all remain on short/intermediate-term ābuy signals.ā However, the Utility Index has registered an intermediate-term āsell signal.ā Frustratingly, it has been difficult to surmount the SPXās overhead resistance zone of 1420 ā 1430, but that has been anticipated numerous times in these reports. Nevertheless, this still looks like an upside ācontinuation patternā to me unless the support level of 1390 ā 1400 is decisively violated.
Speaking to the U.S. Dollar Index (@DX.1/79.55), the weakness anticipated in mid-November has left that index down 2.4% and in jeopardy of breaking below its recent reaction low of 79.36. As stated in November, āA weaker dollar should be bullish for stocks,ā and it has. I actually think the dollarās decline accelerates from here. Said decline should also have been bullish for gold, but that has not been the case. What it has been bullish for is lumber (@LB.1/$345.00), which has traded out to new reaction āhighsā as housing continues to strengthen. To me, all of this is suggestive of an economy that is not going to tilt back into recession. Even if we go over āthe cliff,ā provided it is not for too long, the economy should be able to survive, as should the stock market. The more important question, at least in the short-term, is the overbought condition of the equity markets, a condition that is quickly being corrected. Also worth noting is that while some sectors are overbought, others are oversold, the most obvious of which is precious metals. Another sub-sector that is oversold is the coal sector. Both sectors provide investor friendly risk/reward ratios. For names, we point you to our fundamental analystsā research reports, or to Van Eck International Gold Investors Mutual Fund (INIVX/$17.46), as well as to Van Eck Coal Global Coal Market Vectors (KOL/$25.09). I am also sticking with my bullish ācallā on China of four weeks ago using the ETF of your choice.
The call for this week: If the Mayan calendar is right, and December 21, 2012 represents the end of the world, none of my ramblings matter; and this weekās ācallā should therefore be āparty on Garth.ā But if the earth doesnāt implode, I still think the upside in stocks should be favored. The fact is that governmental spending ācutsā should prove positive for the various markets provided they are too large and do not come too quickly. And while itās true raising taxes is potentially short-term bearish, longer-term it is not; again provided it is not too much of a tax increase. This week is the key, a pullback to the 1400 ā 1410 level, with a concurrent oversold reading from the McClellan Oscillator, could act as a springboard for fabled āSanta Rally.ā But if 1390 is decisively violated, well, āIf Santa fails to call the bears will roam on Broad and Wall!ā
P.S. ā I am in Montreal seeing institutional accounts where it really is a white Christmas ...
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