Tuesday, October 11, 2011

Before the Bell +Subscriber Alert

The Market


The indices (DJIA 11433, S&P 1194) had a spectacular day, leaving them well within their intermediate term trading ranges (10725-12919, 1101-1372).

The force of price momentum (the distance element of our time and distance discipline) took out that short term down trend that we had been watching. In addition, the DJIA closed above the most recent ‘lower high’, while the S&P finished the day right on the mark.

Finally, the S&P broke its 50 day moving average to the upside. The point is that not only has the short term down trend been broken, but also it is not possible to have a fourth ‘lower high’. The next level to watch on the upside is 1230--the late August/early September trading high.

Volume was low; breadth very good. The VIX closed down but remains in the upper zone of its current trading range.

GLD also had a good day which leaves it within its intermediate term up trend.

Bottom line: yesterday’s pin action pretty much defined the low last week as nothing more than a hair raising challenge to the lower boundary of the Market’s current trading range. That leaves stocks firmly in an intermediate term trading range; and despite the recent rally, the upside in this trading range is still more than twice the potential downside. So it is still appropriate to put a little cash to work. However, given the latest dramatic move up, there is probably a decent chance that we haven’t seen the last challenge to 1101. Therefore, I wouldn’t be aggressive in my buying.

Up date on the four bad bear markets (charts):

Up date on Market breadth (charts):



No economic news yesterday.

The bulk of the discussion among Market participants was on Europe and the happenings over the weekend (which I mentioned in yesterday’s Morning Call):

(1) steps by the Belgian, French and Luxemborg central banks to ring fence the bad debts in Dexia, the largest Belgian bank. This is clearly a positive; and more important, it provides a format for the rescue of EU banks in general. That said, the ‘bad loans’ on Dexia’s books are a wart on a goat’s ass relative to the total ‘bad loans’ owned by the EU financial system. So this action, in and of itself, does little to lessen the overall risks attached to EU banks balance sheets.

(2) however, if the Dexia bailout is the model for the Merkel and Sarkozy plan to have a plan [announced yesterday] by late October/early November to secure the EU banking system and protect it from default, then perhaps the eurocrats are making a good faith effort to get ahead of the EU financial crisis. If so, then this is a significant plus. That said, guys who know more about this issue than I tell me that implementing a ‘Dexia’ plan would require amending the Maastricht Treaty which will likely take a year or so. The point here is that even if Merkel and Sarkozy can agree and even if they agree on a truly workable plan, like the ‘Dexia’ model, it can’t happen tomorrow; and in the meantime, Greece is racing towards bankruptcy.

A great look at Europe from 10,000 feet by Russell Napier (6 minute video):

Bottom line: it is possible that the news out of Europe could be game changing if there is sufficient time to implement a Merkel/Sarkozy plan. However, there will likely to be plenty slips between the cup and the lips. So it is way too soon to be too bulled up. On the other hand, the headlines were about as bad as they could get last Monday/Tuesday and the August lows held; and that gives me some comfort that the 10725, 1101 are the downside, barring some unrelated exogenous event.

Ten questions for the bears from Doug Kass (medium):

Subscriber Alert

While I don’t want to chase stocks up as I noted above the risk/reward is still better than 2 to 1; and I don’t want to get left behind if this rally turns into something big. So at the open this morning, our Portfolios will start to re-nibble.

In the Dividend Growth Portfolio: small additions to CR Bard (BCR-$86), Phillip Morris (PM-$66) and a new one half position in Occidental Petroleum (OXY-$82)

In the High Yield Portfolio: small additions to Phillip Morris (PM-66)

In the Aggressive Growth Portfolio: small additions to the Wisdom Tree Emerging Markets ETF (DEM-$50)

CNBC $1 million Challenge Up Date

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

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

Aggressive Growth Portfolio: GLD, GDX, SLV, APH, SCHW

International; GLD, EWC, GDX, DEM