Before the Bell 10/6/11

The Market

Technical

Yesterday, the indices (DJIA 10939, S&P 1144) followed through on Tuesday’s late in the day rally, closing within their intermediate term trading ranges (10725-12919, 1101-1372). Our internal indicator continued to improve; so as I said yesterday, Tuesday may simply have been a white knuckle test of the August lows. Before getting too jiggy, we do need to pay attention to what is now a very short term down trend--there is now a series of three lower highs and two lower lows. The upper boundary of this trend is circa 11110, 1161. I would like to see this trend line broken before sounding the all clear.

Volume fell, breadth deteriorated a bit. The VIX declined but remains in the upper zone of its current trading range.

GLD once again bounced off the lower boundary of its intermediate term up trend.


Bottom line: this two day bounce feels like short covering rally to me; so I am not going to feel that stocks have put the Monday/Tuesday break below the August low behind until they take out that short term down trend. That said, I am not going to argue with the tape.

Did Tuesday afternoon’s ginormous rally portend anything (short):
http://blogs.wsj.com/marketbeat/2011/10/05/yesterdays-face-ripping-comeback-was-probably-not-the-bottom/

Mutual fund flows and NYSE short interest (short):
http://www.zerohedge.com/news/mutual-fund-outflows-surge-nyse-short-interest-back-march-2009-levels-yet-stocks-refuse-plunge-

Fundamental

Headlines

The economic data remains mixed to positive: while weekly mortgage applications fell, purchase applications weren’t off that much, the ADP private payrolls report was modestly up beat and the September ISM nonmanufacturing index was flat with August and remains in plus territory. So the numbers continue the recent trend of relatively positive reports.

We also received some decent news out of our political class for a change. It appears that the three free trade agreements (South Korea, Columbia, Panama), which have been in suspended animation since Obama took office, are going to be voted on in congress and sent to His desk within a week. I think that a very belated but positive sign. Of course, with this group of clowns, it can’t be all good news. So just to reminder us that 2012 is approaching, Harry Reid proposed a 5% tax on millionaires to pay for Obama’s newest ‘jobs’ bill. Fortunately, this has no chance of passing; so it simply contributes to what is the comic theater of Washington.

That our economy continues to show signs of life in face of the incessant calls of recession and that our political class have gotten off the collective duffs long enough to actually do something constructive should be sufficient to give stocks a boost from current undervalued levels.

On the other hand, hanging over both our economy and our Market is our own exposure to a potential implosion in the European economy and that will continue to dominate global as well as US investor attention. However, as I noted before the open yesterday (1) Moody’s downgraded Italian debt [not good] and (2) the IMF stated that it would participate in the purchase of Italian and Spanish debt; but later in the day, it released a statement that has become a commonplace habit among the eurocrats: ‘just kidding’. [also not good]. No one seemed to care.

This is like the polar opposite of what has been occurring for the last month, i.e. before, we got good US economic stats and stocks got whacked anyway because Europe can’t get its s*** together; now we get good numbers and stocks are up in spite of bad news out of the EU. So what gives?

I have three possible explanations: (1) it’s one day, so it’s meaningless, (2) investors are starting to credit eurocrats with progress and one bad day is irrelevant, (3) the worse case out of Europe may now be in the price of stocks and/or (3a) investors still don’t have clue how the European debt crisis will resolve itself but they believe that the worst case COULD be adequately discounted. I am not advocating any alternative; I am simply raising awareness of possible reasons for what I consider a confusing day in the Market as we attempt to divine what is driving equity prices in the volatile, schizophrenic Market.

P.S. meanwhile over night (1) the European Commission President advocated coordinated action by all countries to shore up their banks, (2) Spanish bond prices rose in its latest auction and (3) the Bank of England increased the size of its asset purchase program. All positive developments in the EU problem.

Bottom line: I don’t know how anybody makes an intelligent investment decision in this kind of Market; and that is why I have tried to keep ours to a bare minimum. That said, I have enough confidence in our Price Disciplines, that they will properly guide us when uncertainty reigns supreme. That means Selling when our Stops are hit and Buying when stocks enter their Buy Value Ranges. So our Portfolios will continue to be on both sides of this Market as long as it is in a trading range.