Tuesday, October 04, 2011

Before the Bell + Subscriber Alert

The Market


Yesterday’s pin action was not good. The indices (DJIA 10655, S&P 1099) were not only down big but both busted through the lower boundaries of the intermediate term trading ranges (10725-12919, 1101-1372). Our time and distance discipline now kicks in; so it is too soon to call this challenge a break. That this level has been tested twice before and held is a hopeful sign. However, our internal indicator deteriorated significantly--over 20% of our stocks closed noticeably below the lower boundaries of their trading ranges, while another 10% are on the verge. Should the lower boundaries not hold, next stop is 9645, 1041; and looking forward, if those levels don’t hold, the next noticeable support is the March 2009 lows.

Volume increased; breadth got crushed. The VIX traded up to near the upper boundary of its current trading range. A confirmed break above the boundary would be very negative.

GLD was our hero yesterday. It rose and remains within its intermediate term up trend.

Bottom line: clearly, we are encountering a significant test of the August lows. While I intend to await our time and distance discipline to confirm a break before I start building Portfolio protection in a big way, I am not hopeful based on the action of our internal indicator. Caution is the word.

And now for a little goods news (short):



We received some really good economic news yesterday: domestic auto sales were strong, the ISM’s September manufacturing index came in better than expected as did August construction spending. All in all a great follow through from last week’s positive data.

However, investor attention is back on Europe; so no one cared. Greece was once again a culprit. It seems that it won’t meet the umpteenth downward revision of its budget. In addition, it looks like the largest bank in Belgium is in deep kaka and will need government assistance just to keep its doors open. This, of course, fueled concerns about default and spreading contagion. As you know, I haven’t had much doubt that Greece was going to default for some time now; in fact, I have argued that the best news would be to just do it. Put everybody out of their misery. But the eurocrats just haven’t been able to stay abreast of market events; and the longer they wait, the greater the risk of events getting completely out of their control.

That has been our disaster scenario. Clearly, it is also everyone else’s; and given the uncertainty surrounding what the disaster scenario would even look like, it seems the strategy du jour is to shoot first and ask questions later. Unfortunately, if investor worries are not addressed, this strategy can become self fulfilling. That is, everyone panics including the eurocrats and then they really do something stupid.

Of course, not to be outdone in the race for a position in the Morons Hall of Fame, our senate passed the bill labeling China a currency manipulator and imposing taxes (tariffs) on goods produced there. Worries over a Smoot Hawley II can’t be helping stocks.

Bottom line: I do believe that the US economy is in much better shape to handle an EU disaster scenario than it was back in 2008 when it had to face its own. However, 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 until there is action from the Three Blind Mice, discretion is the better part of valor.

Still plenty of evidence of no ‘double dip’ (short):

The likely effectiveness of the EFSF from Satyajit Das (medium):

And a global outlook from Mohamed El Erian (medium);

More valuation work from Doug Short (medium):

And some investment strategy comments from Steve Leuhold (medium):

Subscriber Alert

Even though our time and distance discipline has not confirmed a break of the Averages, it has done so on several of our holdings. Therefore at the opening this morning, the following will be reduced to 50% positions:

In the Dividend Growth Portfolio: Murphy Oil (MUR-$42)

In the High Yield Portfolio: Caterpillar (CAT-$71)

In the Aggressive Growth Portfolio: EOG (EOG-$71)

Bear in mind that these are trading stops. When the Market flushes and reverses, these stocks will be Bought back.

The stock prices of Phillip Morris Int’l (PMI-$62) CR Bard (BCR-$85) have fallen below the upper boundary of their Buy Value Range. Accordingly, they are being Added to the Dividend Growth Buy List. That Portfolios owns an 85% position in both; so while shares may be purchased in the future, none will be Bought at this time.

PMI is also owned by the High Yield Portfolio (about a 65% position). It will be Added to the High Yield Buy List; but no additional shares will be Bought at this time.

Several stocks on our Buy Lists have traded below the lower boundary of their Buy Value Ranges. Therefore they are being Removed as follows:

In the Dividend Growth Portfolio: Occidental Petroleum (OXY-$69), Avon Products (AVP-$19)

In the High Yield Portfolio: Mine Safety Appliances (MSA-$25), Energy Transfer Ptrs (ETP-$40).

In the Aggressive Growth Portfolio: SEI Investments (SEIC-$14), Amphenol (APH-$40), Avon Products (AVP-$19), Becton Dickinson (BDX-$71).

CNBC $1 million Challenge

Dividend Growth: GLD, CME, IBM, GDX (Gold miners ETF)

High Yield: GLD, GDX, SLV (silver ETF)

Aggressive Growth Portfolio: GLD, GDX, SLV, VXX

International; GLD, EWC, GDX, VXX