Wednesday, September 21, 2011

Before the Bell 9/21/11

The Market, Technical

The Averages (DJIA 11408, S&P 1202) had another volatile day, though they closed above the lower boundary of their short term up trends (11316, 1161) and within their respective intermediate term trading ranges (10725-12919, 1101-1372).

Volume declined; breadth improved including the flow of funds turning positive. The VIX was up fractionally and remains in the upper zone of its trading range.

GLD rebounded above the initial support level after confirming the break of its short term up trend yesterday. This level now becomes the lower boundary of a new short term trading range. As long as GLD holds above this new support level, our Portfolios will hold their current position in GLD.

Bottom line: if the volatility and schizophrenia of the current Market isn’t driving you crazy, I need some of stuff that you are taking. There is no real solution except patience and carefully monitoring our holdings in the context of our Price Disciplines. The Market’s bias appears to be positive; so given current valuation levels, our Portfolios are buyers of stocks on dips, if they just stay there long enough to get a trade done.

What high yield funds may be telling us (short):

The 50 day moving average barrier (short):


The economic news yesterday was mixed: housing starts were off more than expected though building permits were above estimates; weekly retail sales were down week over week but still strong year over year.

Once again, it didn’t matter as all eyes remain on the Punch and Judy show in Europe. Over night S&P lowered the rating on Italian government bonds, but Greece made a circa $700 million interest payment. The relief over the latter coupled with some optimistic statements from EU officials regarding a resolution of the Greek problem out weighted the negative implications of the former.

Then late afternoon, stories circulated that (1) a deal with Greece was in fact not eminent, (2) the Troika (ECB, EU and IMF) would meet this weekend to further discuss the steps needed for a permanent solution to the Greek problem, (3) no decision was likely to be made till October and (4) Papandreou might hold a referendum on austerity measures sent investors back to the exits. Stocks rolled over and ended basically flat on the day--which all things considered, I think a minor victory.

Bottom line: stocks are undervalued as calculated by our Model. Explicit in that is, that the latest yakking about jobs and a balancing budget notwithstanding, the US economy isn’t going to improve from its current state of near moribund growth and the political class will do nothing more than they are currently doing--in other words nothing.

Not to be ignored is the current Fed meeting in which many Market participants are assuming more easing. The GOP leadership just made that a bit more difficult (see below)--thank heavens. The last thing this economy needs is more free money, which incidentally is also in our Model.


Bernanke’s choices (short):

Further, a default/restructuring of Greek debt is also in our assumptions. The problem as exemplified by the spastic performance of equities is that the eurocrats are no better than our own and necessity is dragging them kicking and screaming toward an endgame, whatever its form. The risk is that the endgame occurs before they wise up and take the necessary steps to ring fence Greece and provide for the liquidity demands of the EU financial system. As you know for me the trip wire as to whether they will be successful is whether Greece’s default/restructuring (and I believe that there is virtually a 100% probability of that) is orderly.

On the other hand, I speculated last week that there were some very small but hopeful signs that the Three Blind Mice are moving toward the steps needed to avoid a disaster scenario. I have no idea what the odds are that this will happen, which is why our Portfolios have 10% position in gold, 15-20% in cash and why I am focused on our trading Sell Discipline. In addition, the lower stock prices go, the more the disaster scenario gets priced in which is why our Portfolios on weakness will continue to nibble on those stocks on our Buy Lists (i.e. stocks that are at or near their historical low absolute and relative valuations).

A strategy for dealing with a bear market (medium):

A different look at S&P valuation (short):

CNBC $1 million Challenge

I added the S&P volatility index to each portfolio.

Dividend Growth: GLD, TGT, CME, IBM, SIAL, VXX (the S&P Volatility Index)

High Yield: GLD, CATO, SNY, FII, EMLC (Emerging Markets local currency bonds), VXX

Aggressive Growth Portfolio: GLD, SEIC, LOW, APH, VXX

International; GLD, EWC, EPI, EMLC, VXX

All In: GLD, EMLC, CME, APH, MDVN (Medivation), VXX