Wednesday, August 31, 2011

Before the Bell

The Market


I was a bit surprised that the indices (DJIA 11559, S&P 1212) were able to extent to a new (third) higher high yesterday. However, in doing so, they (1) strengthen the setting of a very short term up trend and (2) remain well within their intermediate term trading ranges (10725-12919, 1101/1172-1372). On any sell off I am now focused on the rising lower boundary of that short term up trend which now intersects at circa 10964, 1134.

Volume was flat; breadth declined. The VIX was basically unchanged--still a negative for stocks.

GLD had a good day. Frankly, when the price broke early last week, I had visions of the same pattern tracing out as occurred in silver in April; but I clearly misjudged the strength of the hands that held GLD. In any case as I said in yesterday’s Morning Call, the second bounce off the lower boundary of its short term up trend was enough to re-establish the sales made the prior week.

Bottom line: yesterday’s pin action added strength to the break of the prior pennant formation and the developing short term up trend. However, intermediate term the Averages are still in trading range; so I would prefer buying on sell offs that test prior lows rather than getting too aggressive buying as prices rise.

High yield indicator--not positive (short):

And another negative signal (short):



Yesterday’s headlines were dominated by economic news. The two biggest items were:

(1) the Conference Board’s August consumer confidence number which was horrendous. At first blush, I would have expected an air pocket. However, remember that it came on the heels of Monday’s better than anticipated consumer spending report; so maybe the proper response is confusion. That said, uncertainty tends to put downward pressure on prices. But investors seemed neither negative nor confused as the Market basically shrugged this data off.

(2) where confusion did appear to reign was at the Fed’s August 9th meeting. The minutes showed at an FOMC at odds with itself over [a] the strength of the economy and [b] mounting inflationary pressures. Of course, the hawks are still in a minority and so the balance of concern is that the economy is weaker than expected and further easing may be necessary. Since most investors want another QE by any nomenclature, the news was well received.

Unfortunately, investors apparently don’t read history. Because while the prior QE’s may have benefited bank liquidity, they would know that those measures didn’t do diddily for economic/revenue/profit growth unless of course you happened to be a gold miner, farmer or an oil production company. I said months ago that there would be a QEIII however it was termed because [a] the Fed is Keynesian, the economy is and will continue to struggle to grow and Keynesians have a inbred instinct to throw money under those circumstances and [b] even if it weren’t, it is part of the political class, the political class’ primary objective is survival to spend another day and right now the head of the political class is Obama who needs [or at least believes He needs] the Fed to survive.

Bottom line: stocks are undervalued and seem to have reached a level that indicates investor acceptance of prolonged sluggish period of economic growth. That is not to say that the political class can’t muck up even a tepid scenario like this when they return is September or that the euros won’t continue their Three Blind Mice routine until the bond vigilantes torpedo one or more of the PIIGS. But our Portfolios hold GLD, several foreign ETF’s and lots of cash to reflect those risks. In the meantime, if our Markets present us with attractive buying opportunities on high quality stocks with an outstanding record of dividend growth, our Portfolios will continue to nibble away.

Here is the most positive take on the EU debt crisis that I have seen lately (medium):

And this also for the bulls (medium):