Friday, August 12, 2011


By Steve Cook
All American Investor

The Averages (DJIA 11143, S&;P 1172) bounced hard yesterday, keeping the recent schizophrenic, roller coaster pin action in tact. I said yesterday that barring a significant rally, I expected a further plunge in prices.

Well, we clearly got the up tick. Importantly, both index closed at or above a major support level (10725, 1172) that had been violated on Wednesday--which under our time and distance discipline negates Wednesday’s decline and leaves 10725, 1172 as potential support levels.

Looking at our Universe of stocks, about half of them traded down to visible support evels and recovered. The other half look like a bungee jumper in mid-flight. In other words, there is nothing there to suggest that major support has been found.

While bottoms tend to be events rather than processes, this week collectively has many of the characteristics of one (extreme volatility and heavy volume). That said, with no follow through, stocks could be just churning in place, anticipating another down draft.

Along those lines, two troublesome signs are that (1) sentiment has improved which is not typical of a bottom and (2) the S&P is on the verge of a ‘death cross’ (where the 50 day moving average falls below the 200 day moving average) which is a very negative
technical signal.

In the meantime, US economic data shows no sign of deviating from our ‘sluggish growth’ forecast; and our political class shows no sign of deviating from their irresponsible, self serving behavior. The EU remains in turmoil; the latest bit of bad news being France’s release of second quarter GDP which grew 0%. That won’t help them reduce their debt which seems to be a key to maintaining their AAA credit rating.

Bottom line: I believe that this latest decline is as much a crisis in confidence over western political leadership as it is the fear of a financial collapse in Europe. I am not sure how to account for the former since I haven’t had much confidence in the last 12 years.

The latter is only partially reflected in our Model; however, our Model now has the S&P Fair Value at circa 1300. So from a fundamental standpoint, the question is how much of the bad news in the headlines is already reflected at 1172?

Unfortunately, I am not smart enough to answer that.

Technically, the question is can the S&P hold 1172? If Wednesday/Thursday was truly a bottom, I would expect strong follow through today. So I am going to sit on my hands one more day before potentially making any moves.

Original content Steve Cook, All American Investor