Wednesday, October 19, 2011

Before the Bell--Deal or no deal?


The Market

Technical


The indices (DJIA 11577, S&P 1225) bounced powerfully yesterday. They successfully challenged that ‘lower high’ (11548, 1219) that I have been focused on for the second time and remain within their intermediate term up trading range (10725-12919, 1101-1372).

The big kahuna now is the 11719, 1230 level. If the Averages can penetrate and confirm a break above those levels, there is no visible resistance until prices reach the top of the current trading range (12919, 1372).

Positively, volume was up noticeably (versus being lower in Monday’s sell off). If a pattern can be established of high volume on up days and low volume of down days, that would be an enormous plus for stocks.

Breadth was strong. The VIX was off, but remained well within that upper zone of its current trading range--a negative for stocks.


GLD plunged intraday, touching the lower boundary of its intermediate term up trend, but then rallied to finish off only fractionally.
http://www.bloomberg.com/video/78102146/

Bottom line: every time stocks have sold off recently, I have opined that a further decline wouldn’t be surprising--and it never happens. Part of that is simply a result of the erratic, vacillating news out of Europe: one day we get good news, the next bad news. But part is also a function of the good news is getting progressively better; demonstrating that the eurocrats are trying hard to get out ahead of their debt problems.

That said, this Market has been way too schizophrenic to be on either side of this Market until it breaks to the upside or trades in the lower portion of its current trading range.

Bernanke, the dollar and what happens to stocks (medium):
http://www.minyanville.com/businessmarkets/articles/daily-cycle-bear-market-Bernanke-stocks/10/17/2011/id/37431

A creepy chart from Chris Kimble:
http://advisorperspectives.com/dshort/guest/Chris-Kimble-111017-Great-Escape-2.php

Fundamental

Headlines


Monday’s over night news (1) disappointing earnings reports from IBM and Goldman Sachs, (2) Moody’s hinting at a down grade of France’s credit rating and (3) China slowing economy set a negative tone for the yesterday morning’s opening. The pre-opening PPI report (hotter than expected) didn’t help. So stocks sold off early in the day.

However, there were rumors out of Europe all day that the eurocrats were making progress on a solution to the debt/banking problem; and stocks slowly recovered. Late in the afternoon, the Guardian (a British liberal rag) reported that France and Germany had agreed to a $2 trillion euro bailout fund. That provided the propellant for the Market to not only end on the plus side but also to blow through a prior resistance level.

After the Market closed there were several follow on reports from other news agencies calling bulls**t on the Guardian story. I have no idea what to make of this. My inclination is to assume that the Guardian didn’t fabricate the story; on the other hand, they could have lots of details very wrong. And as we all know, the devil is always in the details.

Over night Apple missed its earnings expectations; Moody’s down graded Spanish debt; the Greeks are rioting (again); the German bond auction was a dud.
http://www.zerohedge.com/news/german-10-year-bund-auction-fails-cover-issuance-contagion-rages-core

Bottom line: the point here is that without substantiation, the Guardian report is simply a rumor and seems inadequate to sustain a further rise in stock prices. We may get more today or later this week. But until we do, I think it highly tenuous to make a bet on a rumor at the top end of a trading range.

Europe is still deeply divided over resolution of its problems (long but a must read):
http://www.spiegel.de/international/business/0,1518,792229,00.html

John Mauldin on Europe and its problems (6 minute video):
http://finance.yahoo.com/blogs/daily-ticker/deal-no-deal-europe-getting-closer-closer-end-150323310.html#more-id