Before the Bell 9/23/11

The Market, Technical

Are we having fun yet? I don’t need to tell you that yesterday was brutal with the Averages (DJIA 10733, S&P 1129) down big. Nevertheless, both closed within their intermediate term trading ranges (10725-12929, 1101-1372). In other words, they held the August lows, though the DJIA closed perilously close to its low. Further the S&P followed the DJIA below the lower boundary of its short term up trend; and did so with such force that the distance element of our time and distance discipline confirms the break of the short term up trend.

Volume increased; breadth was abysmal. The VIX rose 11% but remains within the upper zone of its current trading range. I also checked our internal indicator again. I noted in yesterday’s Morning Call that Tuesday’s carnage within our Universe was worse than reflected in the indices. However, yesterday the opposite occurred. Not that there wasn’t some serious whackage. It just appears that the Averages caught up with our stocks.
http://www.bespokeinvest.com/thinkbig/2011/9/22/sp-500-breadth.html


With that as a preface, here are the results as of the close last night: in a Universe of 163 stocks (1) with regard to the short term up trend, 123 stocks have broken that trend, 33 have not, 7 are too close to call, (2) with regard to the August lows, 121 stocks have NOT broken that level, 37 have and five are too close to call. What does that tell us? (1) forget about the short term up trend, (2) despite the DJIA holding narrowly above its August low, there is little indication that this low is going to be taken out. The latter is important because our indicator tends to lead the broader Averages (as it did Tuesday); so, at least by this measure, there is a decent chance the 10725, 1101 level will hold. Let me caution that its record is not perfect; but after reviewing yesterday’s results, I feel better than I did at 2PM yesterday afternoon.

GLD got busted along with everything else. As with stocks, the magnitude of the move below the short term up trend is sufficient to confirm its break. Ditto the initial support level. I know that I said that if GLD broke that initial support level, I would likely sell some. But its price drop was so large that it closed right on another level; so I am going to see how it trades today before acting.

Here is an interesting theory as to what drives gold prices (medium):
http://www.crossingwallstreet.com/archives/2011/09/what-operation-twist-means-for-gold.html

Bottom line: after the thrashing equities have taken over the two days, clearly it is a time for caution. However, technically speaking the August lows are simply being tested for a fourth time. If stocks bounce here, our Portfolios will be a careful buyer.

P.S. futures are pointing to a big down opening; so the relief bounce I had expected is not happening. At this moment, it makes no sense to be standing in the front of this oncoming train.

Margin debt is down (short):
http://www.zerohedge.com/news/nyse-margin-debt-plunges-mid-2010-levels-still-60-higher-may-2009-lows

Fundamental

Headlines

(1) US economic news was OK: jobless claims in line, leading economic indicators were down by less than expected,

(2) however, the global economic news was not so hot. The manufacturing and service sector data out of Europe was weak. Plus an editorial by Mohamed El Erian suggesting that the French banks were not in good shape and needed help, pushed the bourses down before our open; and that in turn it spilled over into our early morning trading,

(3) after thinking over night about the Fed’s latest policy moves, investors apparently decided that they were even worse than originally thought,
http://www.zerohedge.com/news/rosenberg-presents-three-ways-bernanke-disappointed-market-and-why-it-dumping

(4) congress is once again dicking around with the debt ceiling while Obama is on the campaign trail talking up His new [$400 billion] jobs bill, deepening the depression investors feel about the inadequacy of our political leadership.

Bottom line: almost everything that could potentially go wrong with the world was in the headlines yesterday. And to be sure, they could all go wrong. But the US economy continues to hang in there despite the onslaught of irresponsible, self serving, third rate policies foisted upon by our moronic political class. More important, this is reflected in our Valuation Model.

The EU economic condition is worse than our own; but there are signs (small to be sure) that the eurocrats have realized that they have reached the point of no return and that they have one last chance at developing a rational solution to their problem (s). The questions, of course, are (1) will they succeed and (2) if they fail, how much of that is in the price of eggs.

I still have no clue; but with stocks 15% below Fair Value (as calculated by our Model) some lack of success is in there. I do believe that our condition is not as bad as was in 2009. But there is a big gap between now (1129) and the March 2009 low (666); so there is still plenty of downside even assuming that I am correct. My only solution to this kind of dilemma is to rely on our Price Disciplines and to recognize that when everybody hates stocks that is the time to Buy them.

Here is a must watch interview with Satyajit Das on the EU crisis (5 minutes):
http://www.minyanville.com/businessmarkets/articles/euro-european-financial-crisis-satyajit-das/9/22/2011/id/37014

Why Operation Twist won’t work (medium):
http://www.investors.com/NewsAndAnalysis/Article/585596/201109211832/New-Fed-Policy-A-Twist-On-Old.htm

And (medium):
http://www.nakedcapitalism.com/2011/09/how-markets-interpreted-the-feds-operation-twist-as-a-sign-of-double-dip.html

And this thoughtful piece on the damage wrought by Fed policy (medium):
http://pragcap.com/misunderstanding-the-effects-of-qe2-was-a-grave-mistake

CNBC $1 million Challenge

As you know, I sold the VXX going into the close last night on the thesis that stocks would likely bounce at the open this morning, if only for a brief time. Of course, that ain't happenin'. How smart am I?

The International Fund is selling the India ETF (EPI) at the open.

Dividend Growth: GLD, TGT, CME, IBM, SIAL,

High Yield: GLD, CATO, SNY, FII,

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

International; GLD, EWC, EPI,

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

Before the Bell 9/23/11 http://bit.ly/qT8NfL