Friday, October 07, 2011

Before the Bell 10/7/11

Note: it is OU-Texas weekend. Friends begin arriving shortly. The rest of the day plus Saturday will be party time. So no Closing Bell this weekend. See you on Monday. Go Sooners.

The Market


The indices (DJIA 11123, S&P 1164) had another phenomenal day closing not only within their intermediate term trading ranges (10725-12929, 1101-1372) but also above the upper boundary of that very short term down trend that I mentioned in yesterday’s Morning Call (11100, 1160). Our time and distance discipline applies; but on short term trends both the time and distance hurdles are less than for longer term trends. So if prices finish today above the upper boundary of the down trend, I will consider the trend broken.

Our internal indicator also improved; so unless we get a sudden, vicious plunge below the 10725, 1101 level, this time it will have failed as an anticipatory signal.

Volume was down, breadth was mixed though the flow of funds indicator was strong. The VIX fell but remains stuck in the upper zone of its current trading range.

GLD rose leaving it within its intermediate term up trend.

Bottom line: the Averages have successfully held the August lows for a fourth time, this one particularly harrowing. That is not to say that there won’t be a fifth attempt. Indeed given the speed and magnitude of the rally off the lows, I would imagine that, at the very least, some profit taking will occur. In the end, stocks are in a trading range which means we want to focus on Buy candidates in the lower quadrant of the range.

Bullish sentiment rises:

This a great comprehensive view of sentiment right now and what it is telling us about Market direction (medium):

For the traders amongst you, this is a must read. It deals with the length on time it takes a stock’s price to adjust to unexpected news (medium):



Yesterday’s economic numbers were unimpressive: September retail sales were OK, but most of the retailers were guiding sales and earnings estimates down; jobless claims were up but not as much as anticipated. So the stats were pretty much a nonfactor.

As I noted yesterday morning, the overnight news out of Europe was positive, indicating that the eurocrats were continuing to make progress, however slow, towards a solution to their debt problems. This seemed to buoy investor sentiment.

The key to keeping that up beat attitude in place is for the powers that be to move fast enough to prevent and stay ahead of investor anticipation of further deterioration in the EU economies. As you know until recently, they were standing around diddling themselves, forget about making headway; and investors were pulling their hair out and marking equity prices down. Now, at least, they are doing something.

Whether it is enough and done soon enough, is to be determined. So I am by no means suggesting that the worst of the EU crisis is behind us. However, it does appear that the eurocrats may now have the message; so the clock, the political class’ courage to do the right thing and how much of the disaster scenario is already in equity prices become the most important variables.

This latest from the BBC (must watch):

Bottom line: the US economy appears to be doing better than many expected. Even if we get a recession, while it is not reflected in our Model, at current price levels I believe that it is likely in the price of stocks. The US political class are collectively a selfish, self serving, clueless lot that will probably not do anything to improve corporate, consumer or investor sentiment prior to 2012--meaning don’t expect any help from those guys on the economy or the Market. But that is in our Model.

Europe is the ‘known unknown’. The eurocrats seem to be at long last taking their economic dilemma seriously. But there are such enormous problems, the consequences of which could make our current forecast look like nirvana. So if or until we have a more concrete plan on resolving the EU sovereign debt crisis, caution has to prevail in investment policy.

More on Market valuation (short):

And how to think about those sickening down drafts (medium):

Some sobering charts comparing the US today with Japan ten years ago (medium):

The optimist’s view (medium):