Wednesday, October 12, 2011

Before the Bell 10/12/11 & Subscriber Alert


The Market

Technical


The indices (DJIA 11518, S&P 1207) made another move up yesterday, leaving them within their intermediate term trading ranges (10725-12919, 1101-1372). Intraday both Averages challenged the next ‘lower high’ (11548, 1219) from the most recent sell off and the DJIA went after the late August/early September high 11715, 1230. Clearly, none of these challenges were successful; and more important, this kind action suggests that prices have finally run into an area of congestion.

Volume rose and breadth improved. The VIX traded down to lower reaches of the upper trading zone in its current trading range; translation, it is the mirror image of the Averages: a bounce would coincide with a decline in stock prices, while a move to the down side would equate to the indices breaking upward.

GLD rose and continues in its intermediate term up trend.
http://www.zerohedge.com/news/global-money-supply-and-currency-debasement-driving-gold-higher


Bottom line: it appears that equity prices hit their first bit of resistance yesterday. After rising so far, so fast, it would not be unreasonable for some profit taking to push prices lower. If that happens, the question will be, will it make another assault on the August lows? If not, it should prove another Buying opportunity.

However, if they break above the 11715, 1230, there is virtually no resistance until the May highs (12919, 1372) are reached.

This for the technical bears (short):
http://www.zerohedge.com/news/guest-post-another-similar-2008-chart-pattern

This isn’t very positive either (short):
http://www.bespokeinvest.com/thinkbig/2011/10/12/djias-fifth-best-start-to-october-since-1900.html

Fundamental

Headlines


Another day of a dearth of economic data: weekly mortgage applications were up much better than expected. But that is not enough, in my opinion, to propel the S&P to up 24 points intraday.

As usual, Europe commanded the attention,

(1) as expected, the Slovakian parliament approved the increase in the size of the EFSF bail out fund,

Of course, it may not matter. (medium):
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100012571/even-a-slovak-yes-will-make-no-difference/

(2) the European Commission proposed [a] plans for a new stress test for the banks, [b] Greece receive a new bail out package and [c] the EU launch a new rescue fund. Investors loved it. Just keep in mind [a] all the prior stress tests have been a joke, so there is some probability that a new one would be no different, [b] Greece doesn’t need another bail out, it needs to go toes up and [c] for a rescue plan to work, the banks have to take a haircut on their sovereign debt holdings and that loss has to be covered at least partially by new equity capital. The good news is that the EC’s proposal stipulates that banks have to go to the private markets before seeking relief from any of the bail out funds. Another small step for mankind.

On the other hand, that may not be feasible, which explains the late day sell off:
http://www.zerohedge.com/news/market-slumps-after-european-banks-admit-they-cantwont-raise-capital-will-proceed-asset-liquida

And Greek math (medium):
http://www.zerohedge.com/news/math-behind-greek-myth

P.S. after the Market closed, the house proved that there is still a tad of sanity in Washington. It both passed the three free trade agreements and rejected Obama’s jobs bill. Three cheers for the house.

Bottom line: yesterday was a day of tiny steps forward both here and abroad. However, as I noted in Wednesday’s Morning Call, the question is whether events are moving faster than the politicians and if they are, the late awakening of the western political class may prove irrelevant. Our politicians have a cushion, the eurocrats not so much. So cash and our Price Discipline remain our greatest assets.

Divining future equity risk premiums (short0:
http://www.capitalspectator.com/archives/2011/10/another_guessti.html#more

This is a great article on stock valuation and in particular how dividend growth stock valuations can differ from the general stock valuations (for those inclined toward a dividend growth strategy as we are, this is an absolute must read):
http://advisorperspectives.com/commentaries/edmp_101211.php

Subscriber Alert

The stock price of Target (TGT-$53) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio owns a full position in TGT; no shares will be Sold.