Tuesday, August 30, 2011

The Market, Technical (8-30)


The Averages (DJIA 11539, S&P 1210) had a great day with both index closing well within their intermediate term trading ranges (10725-12919, 1101/1172-1372). The very good news is that not only did prices break through the down trend line connecting the series of lower (thus, breaking the pennant formation to the upside) highs but also made a third higher high. That sets the short term up trend to up but leaves the intermediate term trading range in tact.

Volume was down; breadth was mixed. The VIX was down 9% but is still at the upper end of its trading range--a negative for stocks.


GLD after a big up open closed down on the day. It finished the day near the lower boundary of its short term up trend. GLD is trading up again this morning suggesting that this boundary has held for a second time, so our Portfolios will Buy back a portion of the shares Sold recently.

Bottom line: yesterday’s pin action appeared to signal that the early August lows will mark the bottom of the recent decline. I say ‘appeared’ because our time and distance discipline applies here. However, yesterday’s move was so pronounced on a percentage (distance) basis that the move qualified as confirmed. I am not going to go all in on one day’s performance; but our Portfolios are going to nibble today and then get more aggressive on a Market decline (assuming it holds the recent lows).

Fundamental

Headlines


We woke up yesterday morning with hurricane Irene having not been as destructive as feared; that likely buoyed investor sentiment. It then got a boost from some decent economic news: July personal income was up in line with forecasts while personal spending came in much higher than estimates. Pending home sales weren’t so hot, but this is a secondary indicator. In any case, the income/spending data suggests that the consumer isn’t dead; and that’s good.

There was even some supposedly positive news out of Europe as the two largest Greek banks decided to merger (like combining two pieces of junk doesn’t make anything more than a giant piece of junk) and got a capital injection from the Qatar sovereign wealth fund. To be sure, that money can absorb some of the losses currently on those banks’ balance sheets. However, I am reminded of the Saudi’s doubling down on their Citibank equity position several years ago. How has that worked out?

Europe still has significant problems (medium):
http://www.bloomberg.com/news/2011-08-29/euro-s-appeal-masks-gathering-storm-in-europe-commentary-by-simon-johnson.html

Along the lines of my recurring theme that the political class is heavily influencing the economics, two events yesterday bear mentioning:

(1) Obama nominated Alan Kreuger to replace Austin Goolsbee as head of His council of economic advisors. I have little knowledge of Mr. Kreuger; but those who do say that he is a Keynesian through and through. That suggests that Obama’s ‘new jobs’ plan to be delivered soon will be more of the same spend, spend, spend on big government projects that has hallmarked His economic policy to date. In other words, our forecast of a sluggish recovery spawned by too much government spending, too much government taxation and too much government regulation is not apt to change.

(2) Kristine LaGarde, the new managing director of the IMF, suggested to the ECB that to avoid disaster, it needed to loosen its monetary policy. Were it to follow her advice, it could assist the EU in navigate through the difficult times ahead. Not that Greece won’t go toes up, and that there won’t be other countries that follow, and not that the EU banking system won’t take in the snoot, and not that it won’t aggravate inflationary pressures; but as we know from our own experience, solvency problems can be lessened [not ameliorated] by plenty of liquidity. Not that the ECB will take her advice; but if it does, the worst case EU sovereign debt crisis scenario could get ‘less worse’.

Bottom line: the economic data, while nothing to get jiggy about, nonetheless continues to paint an economy that is struggling to grow but is not falling into recession. Our political class proves itself second rate daily. But these factors are in our Model and as calculated by our Model, stocks are undervalued. The EU sovereign debt problem is a toss up as to whether it will be worse than reflected in our Model. However, while in no way solving this crisis, Qatar adding to the capital base of the Greek banking system is a positive as is Ms. LaGarde’s advice to the ECB to not make matters worse by enforcing a tight monetary policy in the midst of a solvency/liquidity crisis. With the dramatic improvement in the technical picture, that is sufficient for me to Add to stocks.

The latest from John Hussman (medium):
http://advisorperspectives.com/commentaries/hussman_82911.php

And if you think that is negative, read this (medium):
http://www.minyanville.com/businessmarkets/articles/market-crash-portfolio-advice-trading-tips/8/29/2011/id/36603?camp=featuredslide&medium=home&from=minyanville

Subscriber Alert

At the Market open, our Portfolios are Buying shares in GLD Sold last week.

In addition, the following action is being taken at the Market open:

In the Dividend Growth Portfolio: an initial one half position is being established in South Jersey Industries (SJI-$52) and additions are being made in Federated Investors (FII-$18), Schwab (SCHW-$13) and Nucor (NUE-$36).

In the High Yield Portfolio: addition are being made to Federated Investors (FII-$18), Boeing (BA-$65) and 3M (MMM-$82).

In the Aggressive Growth Portfolio: an initial one half position is being established in Oracle (ORCL-$28) and additions are being made to Altera (ALTR-$37), Reliance Steel (RS-$41) and Staples (SPLS-$15).