Tuesday, October 18, 2011

Before the Bell 10/18/11

The Market


In yesterday’s pin action the Averages (DJIA 11397, S&P 1200) reversed the positive steps on Friday among them trading back below the first ‘lower high’ (11548, 1219). Nevertheless, they remain well within their intermediate term trading ranges (10725-12919, 1101-1372).

Volume was light (versus high volume in the typical sell off of late); breadth was also weak. The VIX soared 18%, trading back into the upper zone of its current trading range. This was not positive for stocks.

GLD was down fractionally, remaining within its intermediate term up trend.

Bottom line: in last weekend’s Closing Bell, I opined that a retreat from the 11719, 1230 would suggest that the recent rally had exhausted itself. It would not be unreasonable to expect more down side from here which I think will offer a buying opportunity.



The economic news yesterday was mixed: the NY Fed manufacturing index was a disappointment while September industrial production was up again.

What really got stocks going to the downside was the weekend dialogue out of Europe in which leaders basically said that they definitely had a plan but definitely didn’t know what it was yet and others should definitely not expect much from the up coming (10/23) summit. Inspirational, yes?

No way out (medium):

And (medium):

One third of the S&P reports this week. Notable yesterday, Citicorp and Wells Fargo released third quarter results, they were not pretty and this added to the down side momentum.

Meanwhile, after hours, (1) IBM and Goldman Sachs, both industry leaders, released quarterly financial results which were disappointing, (2) Moody’s is hinting at a down grade of France’s credit rating and (3) China reported the slowest economic growth in two years, all setting a sour tone for the opening this morning.

Moody’s is worried about France (medium):

Bottom line: as Europe goes, so goes the Market. Occasionally, when the news flow out of euroland is minimal, investors may temporarily divert their attention to other matters. However, when the progress or lack thereof is reported on solving the sovereign debt problem, stocks reflect it immediately. Witness yesterday.

I think that the eurocrats have finally realized the magnitude of their problems and have accelerated their agenda for dealing with sovereign debt and the financial system’s balance sheet. I just don’t know if they will reach an acceptable resolution before the Markets force their own less palatable version. That is the risk to stock prices. That is why our Portfolios have an 18-22% cash position and 10% in gold. It also tempers how aggressive our Portfolios buying will be as prices retreat to the lower levels of the current trading range.

The latest from John Hussman (medium):