Wednesday, November 30, 2011

The Morning Call This is no bazooka


The Market
Technical


Yesterday, the indices (DJIA 11555, S&P 1195) were quiet for a change, leaving them well within their intermediate term trading ranges (10725-12929, 1101-1372).

I have noted several times that, Monday’s bounce aside, there looks to be no support between current price levels and the lower boundaries of the Averages intermediate term trading ranges. In addition, the S&P 50 day moving average is now around 1200 (and declining) and that will act as resistance. Given those two factors, the indices look technically weak.


On the other hand, the individual charts of the stocks in our Universe are (with a few notable exceptions that our Portfolios have acted upon) in considerably better shape than those of the Averages--which raises the obvious question, which is the anomaly? Given our internal indicator’s recent fallibility, I am not about to bet money on our internal indicator being correct; it is worth keeping in mind.

Volume fell, breadth also declined. The VIX was down but remains within the upper zone of its current trading range--not a positive for stocks,

GLD was up fractionally, closing within its intermediate term up trend.
http://www.zerohedge.com/news/china-begins-loosening-cycle-gold-crude-futures-spike

Bottom line: the Averages remain technically vulnerable as do a number of our stocks. As a result, our Portfolios have made trading sales in those issues, reducing their risk. However, judging strictly by the stocks in our Universe, equities don’t appear to be nearly as broken as implied by the indices. Furthermore, I have maintained for some time that I thought that the 10725, 1101 levels would hold in any sell off. That leaves me happy with the sales that we have made but not anxious to make additional sales unless the technicals demand it.

The charts of the commodity indices are clear--avoid risk assets:
http://advisorperspectives.com/dshort/guest/Chris-Kimble-111129-Mixed-Signals-Explained.php

This bounce is more of a loser’s rally than a short covering rally:
http://www.bespokeinvest.com/thinkbig/2011/11/29/a-short-covering-rally.html

Fundamental

Headlines


More good economic news: weekly retail sales were a blow out and consumer confidence as measured by the Conference Board improved considerably. All was not rosy--the Case Shiller home price index continues weak. Nevertheless, the preponderance of the current data points to a continuing recovery in our economy.

Of course, Europe remains the focal point of investor interest. The EU finance ministers are meeting and trying to come up with some plan to salvage the eurozone. The fact that they are meeting seems to be giving investors hope; so coupled with the sunny economic news was sufficient to keep stocks on the plus side.

After the close, those finance ministers announced a proposal that would (1) allow the EFSF to offer up to 20-30% principal protection against any new sovereign issues. It is unclear as to the extent of that protection for any one country. It is also unclear the specifics of the guarantee. Remember, when the Greeks recently defaulted, the eurocrats weaseled the terms of the default so that it didn’t trigger CDS coverage and (2) create a new fund that would purchase older sovereign debt issues. Again no details on size, etc.
http://www.zerohedge.com/news/final-efsf-details-emerge-german-finmin-says-bail-out-fund-wont-halt-crisis

http://www.ritholtz.com/blog/2011/11/flow-chart-for-the-efsf/

I do want to give these guys credit for their continuing effort to solve the debt crisis; but in the recent parlance of the times, this problem needs a bazooka. I know bazookas and this is no bazooka.

Bottom line: Europe continues to hold the key to our Market and Germany is the 900 pound gorilla. I suspect that stocks will have a downward bias until the Germans make a decision/proposal on exactly what they expect in terms of fiscal policies within the PIIGS in exchange for their financial support. In the meantime, aimless volatility will probably prevail. Our task is to pay very close attention to our Sell Discipline.

Some perspective on the PIIGS debt (medium):
http://scottgrannis.blogspot.com/2011/11/putting-piigs-debt-into-context.html

Thoughts on the BRIC’s (medium):
http://www.zerohedge.com/news/albert-edwards-brics-bloody-ridiculous-investment-concept-and-china-hard-landing