Wednesday, October 05, 2011

Before the Bell 10/5/11

The Market


Well, volatility certainly hasn’t gone away. Yesterday, the indices (DJIA 10808. S&P 1123) went on another roller coaster ride, ultimately recovering above the lower boundary of their intermediate term trading ranges (10725-12919, 1101-1372). That re-sets our time and distance discipline; that is, Monday is not considered a break. So any new decline below 10725, 1101 would re-start the process.

That would appear to suggest that Monday was simply another hair raising test of the current trading range. However, while volume rose, in my opinion, it didn’t match magnitude of the prices swings in most stocks. In addition, our internal indicator improved but not enough to give me comfort that the worst is over. Finally, the VIX was down but remains at very elevated levels--historically not a good sign for stocks.

GLD traded off but remained above the lower boundary of its intermediate term trading range.

Bottom line: it looks like the Averages may have come through the biggest test yet of the August lows. As always, the key is follow through; so today’s pin action will be important.

The virtue of taking small losses (short):



The economic news yesterday was mixed: retail sales were so so; factory orders were down but in line with estimates. Not much Market moving material there.

We also got to see the Ber-nank testify before congress. He was a bit down beat on the economy but promised that the Fed was there to help if it was needed. Nothing really new there either. But he also said that the Fed would back stop the US banks if the European financial system imploded. That’s good but what else is he going to say? ‘No senator, f***’em, let them go bankrupt’

So the pin action through most of they day was follow through from Monday, driven by continuing concern about a Greek default and the fall out’s impact on the EU banking system. Then late in the afternoon, the Financial Times reported that the EU financial ministers were looking into ways insure the health and stability of its banks. That started a moon shot that went into the close.

In yesterday’s Morning Call, I said ‘the Markets seem to be bringing to a head the festering zit of the eurocrats inability to overcome their intransigence in ring fencing either Greece and/or their financial institutions. While reason suggests that they will get it done, if only in the nick of time; until it happens, stock prices are going down’. So the question is, is this reported action by the finance ministers ‘in the nick of time’? Given their heretofore belated attempts to deal with their sovereign debt problem, one has to be cynical.

After all, this is a newspaper report, not even an announcement much less a plan. And how many reports have we have heard over time suggesting that the authorities were proceeding post haste to a solution only to find that they were blowing smoke up our skirt? On the other hand, I noted that several ‘better late than never’ moves in the last two weeks indicated that at least EU officialdom wasn’t totally comatose. So the reported move would be another logical step.

This is all a long winded way of saying that I am hopeful but doubtful. The good news is that we are unlikely to have to wait very long to find out how much of this report is smoke and how much is fire. Indeed, it wouldn’t surprise me at all to have enough information to know before we close today out.

P.S. Overnight (1) Moody’s down graded Italian credit [not good], (2) the IMF said that it join the EFSF in buying Italian and Spanish bonds [good depending on the magnitude], and (3) Dexia, the Belgium troubled bank, is spinning off its toxic assets into a ‘bad’ bank that the Belgian and French governments will support [sound familiar?].

Bottom line: the US economy continues to struggle along. The biggest risk to making matters worse is a failure by the eurocrats to provide for an orderly default of Greece (and perhaps other countries) and the stabilization of their banking system in the wake of the fallout. If they can implement a plan to do so, US stocks are undervalued; if they don’t, we could have big problems. The current volatility and schizophrenia in the Market reflects that equation. If yesterday’s report has substance and I hope that it does, then our sales yesterday will look stupid. I only hope that they are the worst decision that I ever made.

Can Europe drag the US into recession (medium):

After all the whackage, valuations are starting to look better (medium):

The latest from John Hussman (medium/long):