Wednesday, October 12, 2011

Before the Bell 10/12/11

The Market


Yesterday, the indices (DJIA 11416, S&P 1195) had a remarkably un-volatile day. They remain within their intermediate term trading ranges (10725-12919, 1101-1372). In addition, the S&P finished the day over its last ‘lower high’, as the DJIA had done on Monday. I continue to watch 1230 on the up side.

Volume was again meager; breadth weakened. The VIX closed off fractionally but remains in the upper zone of its current trading range.

GLD was down but finished within its intermediate term up trend.

Bottom line: given the recent wild gyrations in price and the big upward burst in price on Monday, I was pleasantly surprised that stocks closed basically flat yesterday and with little volatility. However, it is probably too much to think that instability and schizophrenia are a thing of the past. So caution is still important. That said, our Portfolios will continue to nibble in the lower third/quadrant of the current trading range.

More on the Market internals (charts):



The only economic news yesterday was weekly retail sales which were mixed. Nothing price moving about that.

In fact there was very little news yesterday. Most of day, investors spent awaiting:

(1) the vote by the Slovakian parliament on expanding the EFSF bail out fund. Slovakia is the last EU member to take such a vote, so there was some anticipation of the event. Of course, the parliament was expected to vote ‘no’ on the first vote; and it did. However, the vote was more about internal politics [an election, surprise, surprise] than the EFSF; accordingly, the ‘no’ vote was expected as is a subsequent ‘yes’ vote. So no big surprise, no concerns,

A not so positive look at the EFSF (medium):

(2) the kickoff of earnings seasons with Alcoa’s quarterly release. It was disappointing [$.15 per share versus expectations of $.22]; but Alcoa always disappoints. So again there was little reaction.

P.S. after hours our beloved senate passed the China currency manipulation (i.e. trade war) legislation and voted down the Obama jobs bill.

Bottom line: so to recap: investors spent the day awaiting news that was likely to make lousy headlines and reacted (after hours) with indifference to it. Still as I said above, I was impressed that indifference.

Meanwhile, the economy is stumbling along but still hasn’t turned down. Our political class is currently yanking itself off over Chinese currency policies versus facing up to their own complete and utter failure to address the real US economic problems. The latter notwithstanding, our Models incorporates both factors and indicates the stocks are undervalued.

The question remains Europe; the key to which is race between its political class to implement policies to stabilize and support the EU banking system’s ability to withstand bankruptcies/restructurings of sovereign debts and market forces that are demanding those bankruptcies/restructuring. How that race ends will define whether stocks are undervalued, fairly valued or overvalued today. Until we know, it is important to have cash and gold.

The five most likely EU scenarios (medium):