Thursday, September 29, 2011

Before the Bell 9/29/11


The Market

Technical


Volatility yesterday was to the downside with the indices finishing at DJIA 11010, S&P 1151. However, they remain well within their intermediate term trading ranges (10725-12919, 1101-1372).

Volume declined; breadth plunged. The VIX rose 9% but still closed in that upper zone of its current trading range. I observed in yesterday’s Morning Call that many of the stocks in our Universe had gap openings in their near term charts that, technically speaking, had to be closed and that it looked like it would happen soon. Well, ‘soon’ was yesterday. With the necessity of closing the gap now satisfied, the key is whether stocks now stabilize or they follow through to the downside.


GLD sold off and closed right on the lower boundary of its intermediate term up trend--so that trend remains in tact, at least for another day.

Bottom line: one of the most disturbing aspects of yesterday’s pin action was that the stocks of several of our holdings closed the day on the verge of breaking below our trading stops. As I have noted, the current high level of volatility makes for a schizophrenic Market. So if equities trade down today, it is conceivable that our Portfolios could be Buying some stocks while getting Stopped out on others.

A look at margin debt versus Market performance (short):
http://advisorperspectives.com/dshort/guest/Lance-Roberts-110928-Margin-Debt-Clue-to-Market-Direction.php

Fundamental

Headlines


The economic data yesterday was OK: mortgage and purchase applications were up; the headline number for August durable goods orders was disappointing, but inside the data, it was not a bad report (see below). Again, no one cared.

Three items held investor attention and created the pressure on stock prices:

(1) copper prices are collapsing. Since copper prices are correlated to stock prices, it raised investor concerns regarding the Market in general. In addition the Shanghai Composite [stock index] is hitting two year lows sparking worries about a larger than anticipated decline in Chinese [and by extension Asian] economic activity. And since China is a major consumer of copper, the apprehension over the two individually [copper/the Market, copper/China] simply got magnified for both. Clearly, these factors exacerbated current anxiety over recession. Not good for stocks.
http://www.ritholtz.com/blog/2011/09/cruel-king-copper-and-a-low-in-the-shanghai-index/

But never fear, the Ber-nank is here. Last night, he suggested that QEIII is waiting in the wings.

(2) there is still plenty of attention on the ongoing drama in Europe. Yesterday, the Finnish parliament approved the expansion of the EFSF [a necessary component of the new EU financial stability plan]--that should seemingly be interpreted as a positive. However, the German parliament has its vote today; and as you know if you have been following this soap opera, there are serious doubts as to whether the German will approve the new plan. Without Germany, there is no plan. So remembering our own experience with TARP [our beloved ruling class voted against it before they voted for it], some investors decided that discretion is the better part of valor and adios-ed the Market.

P.S. or were they just anticipating ‘selling the news’? The German parliament approved the EFSF expansion by an overwhelming majority. Stocks are selling off.

Ireland versus Greece as candidates for default (short):
http://scottgrannis.blogspot.com/2011/09/tale-of-two-piigs-cont.html

(3) and just to be sure that we haven’t forgot just how stupid they are, the Three Stooges are at it again. This time their intent is to again try to label China a ‘currency manipulator’. I included a chart in yesterday’s Morning Call [and repeat below] just to demonstrate how far off base these yokels are. They say that history repeats itself [think Smoot Hawley], so we know what the endgame looks like. Lest you think me Sinophile, I do believe that, China is screwing us; but their evil deeds are in theft of intellectual property. So once again, these guys can’t get it right--if they were only as funny as the real Three Stooges.


I can find no improvement to yesterday’s 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.’

More on the EU crisis (medium):
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100012223/frau-merkel-it-really-is-a-euro-crisis/

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