Wednesday, September 28, 2011

Before the Bell 9/28/11


The Market

Technical


The Averages (DJIA 11190, S&P 1175) had another roller coaster day yesterday with prices being up strong early in the day and giving up about one half those gains by the close. Nonetheless, both index closed within its intermediate term trading range (10725-12919, 1101-1372).

Volume was above average; breadth remained good. The VIX traded down but still closed at an elevated level within its current trading range. Reviewing all the charts in our Universe last night, the most distinctive thing that I noticed was that many stocks gap opened (they opened well above the prior day’s high), traded higher then late in the day closed near their low for the day. Technicians believe that gaps always get filled (meaning that the stock will trade down to at least the high from the prior day). The gap doesn’t have to be filled immediately; but combining the ‘gap filling’ phenomena with the incredible two day intraday advance suggests that stocks may be ahead of themselves, at least on a short term basis.


GLD rose on decent volume. It remained above the lower boundary of its intermediate term up trend, appearing to confirm support at that trend line.

Bottom line: we have had a couple of good days, but the volatility remains. So as good as Monday and Tuesday felt, we are likely still faced with some gut wrenching days. So don’t get too jiggy. I certainly want to continue to nibble at these levels but it will be in small incremental pieces versus a more aggressive approach.

Historical look at the Market’s performance in October (short):
http://marketsci.wordpress.com/2011/09/26/october-mostly-normal-2/

Has this been a short covering rally? (short):
http://www.bespokeinvest.com/thinkbig/2011/9/27/just-a-short-covering-rally.html


Fundamental

Headlines


Yesterday’s economic news was just so, so: retail sales were mixed, consumer confidence was up but not as much as expected and July home prices were a little better than anticipated.

Once again, this wasn’t investor focus. Early on, the follow through from Monday’s pin action coupled with the Greek parliament passing a property tax (one of the austerity measures that conditioned the receipt of Greece’s second bailout) provided the fuel for soaring prices. Later in the day, the Financial Times reported the EU leaders were not in agreement on the terms of the aforementioned bailout and that led to stocks cutting the gains in half.

How the new EU plan will work (3 minute video):
http://www.zerohedge.com/news/eurofail-video-explaining-eurotalf-dealer-last-resort

Why it ‘might’ work (medium):
http://pragcap.com/more-details-on-euro-tarp

Why it won’t work (medium):
http://www.zerohedge.com/news/guest-post-euro-tarp-why-it-will-be-screaming-failure

Bottom line: stocks remain undervalued, at least as calculated by our Model. The economy continues to struggle along versus slipping into a recession. But we are stuck with the above mentioned gut wrenching volatility in stock prices which is a function of the volatility in the political economy that has been introduced by the political classes in both the EU and US. Unfortunately, that is not apt to change in the US given the entire ruling class is now in full re-election mode or in Europe because of the difficulty in getting 17 countries to agree on the resolution of a self inflicted wound. In the end, that means we use our Price Disciplines to Buy great companies that are Sold down to extreme levels and, in this kind of Market, to maintain trading stops to insure our principal is protected.

The latest from David Rosenberg (long):
http://www.zerohedge.com/news/rosenberg-explains-what-if-anything-has-changed