Tuesday, September 27, 2011

Before the Bell 9/27/11

The Market


The Averages (DJIA 11042, S&P 1162) had a good day and closed within the boundaries of their intermediate term trading ranges (10725-12919, 1101-1372).

Volume was flat; breadth improved considerably, especially the flow of funds. The VIX was down but remains at elevated levels in the upper zone of its current trading range.

Gold was down. Intraday it was quite volatile and traded well below the lower boundary of its intermediate term up trend. However, it finished the day above that boundary. I think the aforementioned intraday plunge had all the looks of a selling climax which is supported by the GLD’s overnight performance. I want to be careful but it is time to Add to this holding.

Bottom line: the indices’ follow through yesterday from Friday’s positive performance was a plus, in my opinion, primarily because it makes last Thursday’s challenge to the lower boundary of their intermediate term trading ranges unsuccessful, adding further strength to this support level. I don’t think that it will be the last test but our Portfolios will nibble again this morning.

A look at the current Markets through the Fibonacci prism (medium):

Global equity markets are in a bear market by some people’s definition. Forgetting that tell me the chart in this link doesn’t look like a developing head and shoulders? (short):



August new home sales was the only data point yesterday--it was a little better than expected. In addition, our beloved ruling class appears to have come up with a budget compromise that will keep the government’s doors open until mid-November--that also is a little better than expected.

But not to sound like a broken record, Europe continued to be the focus of investor attention. And surprise, surprise, this time we got some good news. It appears that the eurocrats having been doing something useful besides sitting in cafes, sipping wine and watching the skirts. At this point, nothing is confirmed but the generally accepted rumor is that the EU will employ a much expanded ($400 billion) the EFSF (bail out fund). It will use the proceeds to (1) shore up bank capital and (2) provide seed money to the European Investment Bank [owned by all the EU countries] that will in turn create a Special Purpose Vehicle that can leverage the seed money 8-10 times by issuing bonds, the proceeds of which will be used to buy sovereign debt from the EU banks. It sounds more complicated than need be but there are some legal/political issues that require that it be done this way. In the end, this is just a euro version of TARP which worked reasonably well for us.

Bottom line: the Market was clearly encouraged by the EU rumor; as was I. But let’s be clear. (1) this plan may never be implemented [see below], (2) if it is, it has its shortcomings [see below], (3) it doesn’t address the austerity required to make the EU solvent in the long run and (4) it says nothing about the upcoming Greek debt payment. Nevertheless, it does continue the progress that I argued two weeks ago was the first hopeful sign that the eurocrats weren’t going to let the EU financial system implode.

This: http://www.zerohedge.com/news/germanys-fdp-merkel-should-make-clear-immediately-there-no-change-business-model-efsf

And this http://www.nakedcapitalism.com/2011/09/can-european-politicians-beat-the-clock-and-stave-off-a-crisis.html

So it is way too soon to be tip toeing through the tulips. On the other hand, this plan, if implemented, is better than a sharp stick in the eye. As a result, the likelihood of the disaster scenario declines a bit further. That suggests that more nibbling makes some sense.

The latest from John Hussman (long):

Speaking of which, this analysis is similar to the work that Hussman does. It is a bit long but is today’s must read:

For the bears amongst you (3 minute video):

Subscriber Alert

A small addition to the GLD holding will be made in each Portfolio at the Market open.

Small additions to the following holdings will be made at the Market open;

In the Dividend Growth Portfolio: FII ($18), BA ($62), SCHW ($12)

In the Aggressive Growth Portfolio: ORCL ($28), LOW ($20), SCHW ($12)

CNBC $1 million Challenge

Additional shares of GLD will be bought at the open this morning

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

High Yield: GLD, CATO, SNY, FII,

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

International; GLD, EWC,

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