Thursday, September 08, 2011

Before the Bell 9/8/11

The Market


The indices (DJIA 11414, S&P 1198) experienced great follow through yesterday. That leaves them solidly within their intermediate term trading ranges (10725-12919, 1101/1172-1372). The S&P clearly recovered above 1172 support level, leaving in question whether 1101, 1172 is the low of its current trading range. The lower boundary of the Averages short term up trend now intersects at 11094, 1142.

Volume declined (not good); breadth improved. The VIX fell 10% but remained in the upper zone of its current trading range. We need more downside for this indicator to be positive for stocks.

GLD got whacked but closed right on the lower boundary of its short term up trend; so there was no real technical damage done. Of course, if it breaks that lower boundary, that would be at least a short term negative; and depending on the magnitude of any break, I may have to reconsider our Portfolios’ recent Buy.

Are we near the top? (medium):

Bottom line: the good news is that the lower boundary of the short term up trend held; the bad news is we are still stuck with nerve wracking volatility. As before, I am not going to chase prices up. We will likely get another opportunity to Buy shares on another test of support.



We received a couple of minor economic data points yesterday: weekly mortgage applications (bad though purchase applications were up) and weekly retail sales (mixed). In addition, the Fed released its latest Beige Book report which told us nothing: some districts are experiencing growth, some are slowing. Investors snoozed.

Finally, some analysts got a ‘tingle up their leg’ when they got the advance look at Obama’s jobs speech. The main proposal appears to be a $300-$400 billion stimulus plan consisting tax cuts and infrastructure spending. Excuse me, but my leg isn’t tingling nor is any other body part, some of which I can only wish were tingling. The reason? no mention of easing government regulations, no mention of free trade agreements, no mention of repatriating billions of corporate funds trapped overseas, no mention of tax reform. Just more imaginary ‘shovel ready’ poppycock. I seriously doubt that the Market was up on this bit of day dreaming.

A fact regarding ‘crumbling infrastructure’ (short):

Other big headlines came from overseas:

(1) as I reported yesterday, the German court up held the constitutionality of the 2010 Greek bailout but stipulated that any additional bail out funds had to be approved by the parliament’s budget committee. In addition, a report on the German industrial production was quite positive [that seemed to get investors hopping],

(2) the Italian senate passed the more austere budget proposal that I mentioned yesterday and now it goes to their house.

Both of the above generally eased concerns about the EU debt crisis; and to be sure, more responsible fiscal policies are long term positive. However, bear in mind that the scenario in which the PIIGS adopt austerity measures plays into concerns about global economic growth.

(3) in a report by a well regarded analyst, she expressed the belief that upcoming data on the Chinese economy will be weak enough that the Central Bank of China will began easing monetary policy. Similar to the point I made above, while it is a positive that Chinese monetary authorities won’t stay too tight too long, the fact that they are easing due to weakening growth numbers suggests further problems for global growth.

Bottom line: it appears that the EU may be inching closer to the necessary austerity needed to avoid multi country defaults/restructurings. Long term that would be great; short term it is a problem for global growth--though that is less of a problem for our forecast than multiple defaults. Unless all the ‘leaked’ proposals are a giant head fake by Obama, He is doing exactly what I expected--continuing His failed liberal Keynesian economic policy. That is also in our forecast. So basically, measured by of Model, yesterday was a nonevent. Nevertheless, progress in the EU, if that is what is happening, could be minimizing the likelihood of a worse case.

The latest from Jon Hussman (long but a must read):

Another great piece by Doug Short; this one looking at future corporate profitability (medium):