Thursday, September 22, 2011

Before the Bell 9/22/11


The Market, Technical

The indices (DJIA 11124, S&P 1166) continued their manic depressive performance yesterday, although they remained within their intermediate term trading ranges (10725-12919, 1101-1372). However, the DJIA once again traded below the lower boundary of its short term up trend (11343) while the S&P remained above its comparable trend (1159). That (1) re-starts our time and distance discipline for the DJIA’s break and (2) puts the Averages out of sync.

Volume increased; breadth cratered. The VIX rose but remains in the upper zone of its current trading range.


 


Bottom line: looking through the charts of the companies in our Universe, yesterday’s carnage was even worse than reflected in the indices. A majority of our stocks were driven to either the lower boundary of their short term up trend or to the lower boundary of their intermediate term trading range (the August lows)--the point being that a down close again today will likely mean at least a test of the August lows and raises the odds of something worse. On the other hand, a bounce will just mean another successful test of the short term up trend. So today’s pin action could be potentially critical to the technical outlook; but till we know, patience.

Fundamental

The economic data yesterday was mixed to positive: weekly mortgage applications were up but purchase applications were down; more important, August existing home sales were much stronger than anticipated. Once again, no one cared; though Europe was relatively quiet.

Rather this time, the Market spent the day waiting for the release of the Fed statement following its regularly scheduled two day meeting. I frankly thought that there was a decent chance that Bernanke & Co. would, in addition to or instead of Operation Twist, propose some sort of QEIII. Didn’t happen. Instead in addition to leaving interest rates unchanged, they did do Operation Twist (selling short term Treasuries on the balance sheet and reinvesting the funds in long Treasuries with the intent to drive down long rates) in about the size that was expected ($400 billion).

The rest of the statement read about the same as recent statements (the economy is sluggish, most sectors are weak, inflation is moderating, yak, yak, yak) EXCEPT it altered its characterization of the downside risk to the economy to include the word ‘significant’--which it attributed to its growing concern about financial viability of Europe.

Investors were clearly not happy with Bernanke. First, their already heightened fears over Europe were made worse. Second, there was consternation that (1) the Fed would state that the risk in the system had increased [EU sovereign debt risk], (2) but it also stated that the purpose of Operation Twist was to lower long term interest rates [the lower the long term interest rates, the less the reward for taking risk]. In other words, it says there is more risk but it reduces the returns for taking it. Finally, Moody’s lowered its rating on US banks (who just took a hit to their income statements as the Fed lowers long interest rates--remember they borrow short and lend long). Stocks rolled over and the S&P lost 3% in the last hour.

Bottom line: once again, Bernanke et al just made matters worse. Frankly, I am not so concerned about their worry with Europe--they were stating the obvious. But I just don’t get them fretting about more risk and then adopting a policy that encourages investors not to take it. Plus they screwed the banks which are the weak link in the system right now. Although I am not yet sure by how much, this moves the needle closer to a recession scenario. The assumptions is our Model may be too optimistic--we may be dealing with a third rate political class.

The problem with exiting the euro (medium):
http://www.ft.com/intl/cms/s/0/f2133a2e-e2e0-11e0-903d-00144feabdc0.html#ixzz1Ya5BHlSx

Subscriber Alert

The stock price of Occidental Petroleum (OXY-$77) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio does not own a position in OXY presently and no shares will be purchased at this time.

The stock prices of Staples (SPLS-$13) and Teva Pharmaceuticals (TEVA-$37) have traded below the upper boundaries of their respective Buy Value Ranges. Therefore, they are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns both stocks; but not full positions. No shares will be purchased at this time.

You may recall, TEVA had been on the Buy List, traded below the lower boundary of its Buy Value Range and it was then Removed from the Buy List. However, because it did not trade down to its Stop Loss Price, the Aggressive Growth Portfolio continued to Hold TEVA. In a subsequent review of the company, its Valuation Range was re-set; so this latest change in rating reflects that new Range.

CNBC $1 million Challenge

As you know, I sold the VXX ahead of yesterday’s Fed announcement. My reasoning which I did not go into in the email was that I expected the Fed to surprise us with an easier policy than consensus thinking. How did that turn out, Steve? Well, our Portfolios made a little profit instead of a big profit. How smart am I? I am buying it back this morning.

The Fed’s action really got the dollar soaring; so I am selling the local currency bond.

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

High Yield: GLD, CATO, SNY, FII, VXX

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

International; GLD, EWC, EPI, VXX

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

The Market

Technical

The indices (DJIA 11124, S&P 1166) continued their manic depressive performance yesterday, although they remained within their intermediate term trading ranges (10725-12919, 1101-1372). However, the DJIA once again traded below the lower boundary of its short term up trend (11343) while the S&P remained above its comparable trend (1159). That (1) re-starts our time and distance discipline for the DJIA’s break and (2) puts the Averages out of sync.

Volume increased; breadth cratered. The VIX rose but remains in the upper zone of its current trading range.

Bottom line: looking through the charts of the companies in our Universe, yesterday’s carnage was even worse than reflected in the indices. A majority of our stocks were driven to either the lower boundary of their short term up trend or to the lower boundary of their intermediate term trading range (the August lows)--the point being that a down close again today will likely mean at least a test of the August lows and raises the odds of something worse. On the other hand, a bounce will just mean another successful test of the short term up trend. So today’s pin action could be potentially critical to the technical outlook; but till we know, patience.

Fundamental

The economic data yesterday was mixed to positive: weekly mortgage applications were up but purchase applications were down; more important, August existing home sales were much stronger than anticipated. Once again, no one cared; though Europe was relatively quiet.

Rather this time, the Market spent the day waiting for the release of the Fed statement following its regularly scheduled two day meeting. I frankly thought that there was a decent chance that Bernanke & Co. would, in addition to or instead of Operation Twist, propose some sort of QEIII. Didn’t happen. Instead in addition to leaving interest rates unchanged, they did do Operation Twist (selling short term Treasuries on the balance sheet and reinvesting the funds in long Treasuries with the intent to drive down long rates) in about the size that was expected ($400 billion).

The rest of the statement read about the same as recent statements (the economy is sluggish, most sectors are weak, inflation is moderating, yak, yak, yak) EXCEPT it altered its characterization of the downside risk to the economy to include the word ‘significant’--which it attributed to its growing concern about financial viability of Europe.

Investors were clearly not happy with Bernanke. First, their already heightened fears over Europe were made worse. Second, there was consternation that (1) the Fed would state that the risk in the system had increased [EU sovereign debt risk], (2) but it also stated that the purpose of Operation Twist was to lower long term interest rates [the lower the long term interest rates, the less the reward for taking risk]. In other words, it says there is more risk but it reduces the returns for taking it. Finally, Moody’s lowered its rating on US banks (who just took a hit to their income statements as the Fed lowers long interest rates--remember they borrow short and lend long). Stocks rolled over and the S&P lost 3% in the last hour.

Bottom line: once again, Bernanke et al just made matters worse. Frankly, I am not so concerned about their worry with Europe--they were stating the obvious. But I just don’t get them fretting about more risk and then adopting a policy that encourages investors not to take it. Plus they screwed the banks which are the weak link in the system right now. Although I am not yet sure by how much, this moves the needle closer to a recession scenario. The assumptions is our Model may be too optimistic--we may be dealing with a third rate political class.

The problem with exiting the euro (medium):
http://www.ft.com/intl/cms/s/0/f2133a2e-e2e0-11e0-903d-00144feabdc0.html#ixzz1Ya5BHlSx http://www.ft.com/intl/cms/s/0/f2133a2e-e2e0-11e0-903d-00144feabdc0.html#ixzz1Ya5BHlSx

Subscriber Alert

The stock price of Occidental Petroleum (OXY-$77) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio does not own a position in OXY presently and no shares will be purchased at this time.

The stock prices of Staples (SPLS-$13) and Teva Pharmaceuticals (TEVA-$37) have traded below the upper boundaries of their respective Buy Value Ranges. Therefore, they are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns both stocks; but not full positions. No shares will be purchased at this time.

You may recall, TEVA had been on the Buy List, traded below the lower boundary of its Buy Value Range and it was then Removed from the Buy List. However, because it did not trade down to its Stop Loss Price, the Aggressive Growth Portfolio continued to Hold TEVA. In a subsequent review of the company, its Valuation Range was re-set; so this latest change in rating reflects that new Range.

CNBC $1 million Challenge

As you know, I sold the VXX ahead of yesterday’s Fed announcement. My reasoning which I did not go into in the email was that I expected the Fed to surprise us with an easier policy than consensus thinking. How did that turn out, Steve? Well, our Portfolios made a little profit instead of a big profit. How smart am I? I am buying it back this morning.

The Fed’s action really got the dollar soaring; so I am selling the local currency bond.

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

High Yield: GLD, CATO, SNY, FII, VXX

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

International; GLD, EWC, EPI, VXX

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